asking about buy options ITM and OTM in earnings play

[spindr0]

Quote from d.tradersam:

i bought 80 call june 2010 and 85 call june 2010.
Well. although it's bulllish, it just moved slightly. But when i compare the gain result, the 85 call was more profitable than 80 call.

The lower strike will tend to gain more in terms of dollars but less in terms of per cent. However, this isn't etched in stone because you have mutiple factors affecting the change in premium: time decay is high, IV is changing going into the EA, gamma is increasing more for the OTM as price rises so net net, it's possible for the lower strike to have a greater pct gain.


is it good or better using OTM then ITM/ATM when playing earnings (if we're sure about the direction) ? why ?

It depends on how you define better. Is better a larger dollar gain or a larger pct profit? Are you comparing 1 of each option or are you making an equal dollar investment?

OTM options provide leverage. So being sure about direction isn't enough. You have to get size of move right in order for them to succeed. IOW, ITM/ATM is better for a small move. OTM is better for a BEEG move.

 

[Haroki]

Quote from spindr0:

^^^^^^^^^^

Good advice right there.

ITM moves with the underlying, and the deeper you are ITM, the more linear the move. So, for instance, if you're in, say, 109 SPY calls - right now - and tomorrow SPY goes up .50, the call will go up ~ .45.

Compare to 111 calls, which might go up ~ .30.

Or 113 calls, which might go up ~ .10. Or even go down.

Then your profitability % depends on the price you bought at.

Bottom line - deeper ITM = lower % returns, but more security.

IMHO

ETA: forgot to add that how close the option will follow also depends on the date. Close to the date, say the last week = about how I described above. 1-2 weeks out, and the moves will be more along the lines of .30, .15, and zero, respectively.