I think the cup is deep enough too. If you go deeper,, two things can go sideways for you: your hammer will reach further forward so that the nipple will come into contact at the back of the cup rather than the centre, and secondly, your tumbler may come to rest on the bridle before the hammer finishes its throw.
But on the RE Davis hammer, copying Ron Long's lock, the cup DOES need deepening. And sometimes, the angle of the cup needs to be altered so that the hammer strikes the nipple squarely. The photo above is an example of that.
I made my cutter from a 5/16" drill bit. Like David, I ground it off flat. But since the business end of the hammer is tapered, if a parallel sided bit is used, the cup may become very fragile at the bottom of the cup...walls too thin. So I tapered the end of the drill bit over about 3/16" so the end of the bit is .270". Then I ground some draft/rake on the edges so that they would still cut, and gave the same treatment to the flat tip, so that the bit would cut on the plunge. Here's some images of the bit I made. It has been used to alter at least two hundred hammers without having to sharpen it.
The altered bit is pictured along with an unaltered bit. The last pic is the job it does. The last thing to do to the hammer nose is to split it so caps dislodge themselves. To do this I use a hack saw, a skinny flat file and a triangular file with a safe ground edge. This hammer cup is .160" deep.