I understand that OTM options with low deltas are not that attractive, hence liquidity is less. But how about deep ITM options, why is the liquidity not there? Deep ITM options are a cheap way to achieve same risk required profile as holding the underlying, so how come there are no buyers for these options?
As a side note, if I am long a deep ITM option and I am sitting on a profit, then in absence of liquidity, my alternative is to exercise the option, and then close out the resulting underlying position,correct? Apart from bid-ask costs and trade commissions, are there any other catches with this profit taking method?