When you hear traders or investors talk about being ‘deep in the money’, it’s not just jargon—it’s a position that can unlock strategic advantages, especially in today’s evolving Australian financial landscape. As options trading grows in popularity and regulatory shifts reshape the market in 2025, understanding this concept is more important than ever.
What Does ‘Deep In The Money’ Really Mean?
In the options world, an option is ‘in the money’ (ITM) if it would have intrinsic value if exercised today. When it’s deep in the money (DITM), the option’s strike price is significantly below (for calls) or above (for puts) the current market price of the underlying asset. This gives the option substantial intrinsic value and behaves more like holding the actual stock or asset itself.
- Example: If BHP shares are trading at $50, a call option with a $40 strike price is deep in the money—it lets the holder buy shares well below market price.
- For Puts: If you hold a put with a $60 strike while BHP is at $50, that’s deep in the money too.
DITM options are less risky than at-the-money or out-of-the-money options, as their value is largely based on the difference between the strike price and the current share price, not just time or volatility.
Why DITM Options Are Gaining Traction in 2025
Australian investors are increasingly turning to deep in the money options for several reasons:
- Lower Premiums Compared to Buying Stock: DITM call options can mimic stock ownership with less upfront capital.
- Reduced Volatility Risk: Their value depends mostly on intrinsic value, not short-term price swings.
- Tax Efficiency: With the ATO’s 2025 updates, certain options strategies may offer improved capital gains treatment for long-term investors.
- Liquidity Improvements: The ASX has expanded its options offerings and tightened spreads, making it easier to buy and sell DITM options with confidence.
In 2025, tighter regulation around speculative derivatives and increased transparency requirements mean many self-directed investors and SMSFs are gravitating toward less risky, more straightforward strategies like DITM calls and puts.
Real-World Strategies for Deep In The Money Options
How are Aussie investors putting DITM options to work in the current market?
- Stock Replacement: Instead of buying 1,000 shares of CSL at $280, an investor might buy DITM call options with a $250 strike, gaining exposure with less capital and potentially limiting downside.
- Covered Calls: Investors holding shares can sell DITM calls to generate income, especially when anticipating sideways market action—a popular approach in 2025’s choppy, post-inflation market.
- Risk Management: Some SMSFs use DITM puts as insurance on large holdings, locking in sale prices well above current market value if a downturn hits.
Consider the impact of the 2025 ASX option contract reforms, which introduced shorter settlement windows and new margin requirements. These changes have made it more attractive—and safer—for retail investors to use DITM strategies, reducing the risk of margin calls and improving overall transparency.
Key Considerations and Potential Pitfalls
While deep in the money options offer compelling benefits, they’re not without risks:
- Liquidity: Not all DITM options are actively traded, especially on mid-cap or low-volume stocks. Check bid-ask spreads before entering a position.
- Early Exercise: In Australia, American-style options can be exercised at any time. Sometimes, DITM calls are exercised early if dividends are imminent—factor this into your strategy.
- Tax Complexity: The ATO’s 2025 updates have clarified some issues, but options transactions can still create unexpected tax events. Tracking transactions accurately is essential for compliance.
For those using DITM options as a stock replacement, remember that you forgo dividends unless you exercise the option and own the stock outright. In a high-dividend year like 2025, this can impact total returns.
Conclusion: Is ‘Deep In The Money’ Right for You?
As Australia’s options market matures in 2025, deep in the money options are shedding their reputation as a tool for the pros and finding their place in mainstream investing. Whether you’re seeking lower-risk leverage, efficient capital deployment, or smarter risk management, DITM options could be a strategic fit. Evaluate your own goals, understand the mechanics, and keep a close eye on regulatory shifts to make the most of these powerful instruments.
