Basic Option Question?
- Thread starter Baker200
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Did you really just say buying deep itm calls is like buying on margin lmao. Not even close. One you are borrowing cash with a fixed interest rate, and the other is an option contract... with deep itm calls you pay a fraction of the share price with limited risk and margin you are borrowing cash with it all at risk and paying %...
Buying on margin is a fools game when you could buy deep itm calls and pay a tiny fraction of the price of the shares. Margin is for suckers and only makes brokers rich, hence why firms and professional money managers use options, not margin...
The "premium" is mostly intrinsic value and you limit your downside by 80-90%. I use deep itm calls as a stock replacement and I never buy commons. Also, as you approach expiration, you can just roll the option back another year, and up a few strikes to take profits out. ... and as long as you are buying deep itm(0.7-0.8 Delta) the amount of extrinsic value will be negligible.
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Uh... if you think that you don't pay interest when you buy ITM calls... you need to redo your options 101 course.
If you buy 1000 stocks at 100 dollars on margin, where the margin is 50% of value... that's pretty much the same as buying the 50 call...
At 50 (on expiry) you lose the full amount of margin resp. options premium. At 150, you make 100% return in both situations.
Maybe you pay a bit higher interest rate on the margin with you broker, but essentially they are quite similar. You pay interest over the 50 bucks.... in the options on the 50 strike, and with margin on the 50 margin.
I'm getting my information from having been an options market maker for 10 years...
You said this: "Did you really just say buying deep itm calls is like buying on margin lmao. Not even close" on @ironchef's post regarding ITM options are similar to buying on margin.
If I would use 50% margin on buying a $100 stock.. that means my capital outlay is $50 and borrow $50 at brokers interest rate.
If the stock drops to 50, I stand to lose my entire capital outlay of $50 and if I don't have anymore cash to put up as margin... I get liquidated. So 100% loss on capital.
If the stock goes to 150... I make 50 bucks on 50 capital outlay, so 100% return.
If I would buy the 50 call, that would cost me $50 + interest, since that's how options work.
If the stock expires at or below 50... I lose my total capital outlay of 50, since the call is 0... so 100% loss.
If the stock expires at 150... my call is worth 100, so I make 50 buck, 100% return.
Before you try to outsmart a market maker and try to burn someone else's correct comments/posts.. please get your theory in order first, because obviously you're lacking in that regard.
You said this: "Did you really just say buying deep itm calls is like buying on margin lmao. Not even close" on @ironchef's post regarding ITM options are similar to buying on margin.
If I would use 50% margin on buying a $100 stock.. that means my capital outlay is $50 and borrow $50 at brokers interest rate.
If the stock drops to 50, I stand to lose my entire capital outlay of $50 and if I don't have anymore cash to put up as margin... I get liquidated. So 100% loss on capital.
If the stock goes to 150... I make 50 bucks on 50 capital outlay, so 100% return.
If I would buy the 50 call, that would cost me $50 + interest, since that's how options work.
If the stock expires at or below 50... I lose my total capital outlay of 50, since the call is 0... so 100% loss.
If the stock expires at 150... my call is worth 100, so I make 50 buck, 100% return.
Before you try to outsmart a market maker and try to burn someone else's correct comments/posts.. please get your theory in order first, because obviously you're lacking in that regard.
But if the market goes south and falls drastically and gaps down, you will lose more money then you initially invested. You would hope youd get liquidated...
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No.. that's not interest. The interest component is the bit that's related to the interest rate according to the forward pricing of options... If there's no dividend involved, the interest you have paid on this 50 call is about 90 cents, which is included in the price... because that's how options are priced...
Depends on a) your broker, b) your position size compared to account size, c) the stupidity level of the trader itself.
I didn't say it's exactly the same, but very much similar. What @ironchef said is a lot more correct than what you said.
If you want exactly the same thing.. you have to buy the 50 put (valued at not much) together with the stocks on margin as well... so you're protected on a collapse beyond 50.
Put/call parity...
Also if you have 100k in the account,
Buy the 50 put for protection also lol. Why not just buy the deep itm call? Still seems silly to buy on margin when you can use deep itm calls. I prefer the discount, smaller "interest rate" and keeping tons cash available on the side, than to fully invest and borrow money against my equity
That's entirely different, what you prefer is not in question.
Fact is that both are very similar, both are leveraged trades which include interest. As I said 1 post ago, if you want the exact same thing you would need to buy the put option which for a strike that far OTM is 0.00. It's called put/call-parity.
Your mind is wrong, accept it and move on... it's just the way it is.
PS, @Muffhands if I came on a bit too strong for you, my apologies. But I'd rather get the facts across correctly so a newbie isn't wrong-footed...