Basic Option Question?

[ironchef]

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.

Been there done that with DITM calls. Let's just say I no longer do those trades and I have been trading options full time since 2013. I don't buy stocks on margins either.

5 years is considered a short time in option trading experience, so like you I am also a newbie, a small mom and pop retail trader.

I am humbled by the willingness of the ET pros to teach and coach us.

Welcome to ET.

 

[spindr0]

JackRab,

Regarding your margin versus buying the ITM call comparison, sometimes these details are obvious in isolation but it takes a clear and thorough explanation like yours to connect the dots to enable it to sink in. Thanks.

 

[TrustyJules]

A lot of things are hypothetically equivalent but can work out differently in practice. In continental Europe margin accounts are not really common and hence trading stocks in margin is less common. I am pretty sure psychologically some people - wrongly - feel that buying a ITM option is somehow cheaper than buying stock with cash and margin.

What really makes a difference can be unrelated things. In the Netherlands there is a very strict coverage of all loans and credits extended to someone. They are centrally notified to an institution called BKR - if you have a margin loan for trading this will be noted. if you then apply for a mortgage your bank will say you already have loans and credits and reduce the size of your mortgage. 50 seconds later you are trading ITM options rather than on margin. I am pretty sure similar considerations occur - its also a matter of personal preference. If you are very option savvy there is nothing wrong with deep ITM options, if you are more of a trader on stocks stick to that and leverage with margin.

 

[jimmyjazz]

My thoughts, for what they're worth:

1. B/A spread can be tough to deal with on ITM options.
2. for a trader whose account has a required settling time, it can be advantageous to trade options instead of the underlying, due to reduced capital requirements (long options)

 

[Muffhands]

The huge gains I have been getting (60-100% per trade) have enormously outweighed the b/a spread. Plus if you don't want to pay the spread, you can short the stock against your call to lock in profit, and wait for it to expire, exercise the call and sell the shares on the market. I love ditm calls. Interest or not

 

[Windlesham1]

The huge gains I have been getting (60-100% per trade) have enormously outweighed the b/a spread. Plus if you don't want to pay the spread, you can short the stock against your call to lock in profit, and wait for it to expire, exercise the call and sell the shares on the market. I love ditm calls. Interest or not

You've no idea about a bear market then- QE since 2009 has made geniuses out of a lot of people

 

[Muffhands]

You've no idea about a bear market then- QE since 2009 has made geniuses out of a lot of people

Because I love deep in the money calls lol?.... and because I mentioned a strategy to avoid the spread? How does that have anything to do with a bear market lmao.

I understand we are in a bull market... a bear market could whipe out no more than 10-20% of my account because that's all I have at risk and my deep itm calls are leveraging my entire account+ More. If a bear market comes, I sit and wait. Roll my options out with the massive pile of cash I have on hand and load up on commons. .

for example, with 100k, I only have to risk about 15-20 grand at any given time to control about 100k-150k worth of shares or more, and I keep the other 75-80 k cash. It's not rocket science. I don't know why everyone is saying 50% of the stock value and comparing to margin. That's why this whole margin argument is wrong. I never pay 50% of a stock price when using deep itm calls. Never. That argument only works if you are buying calls at 50% if the stock value. Who the fuck does that. Thanks tho.

 

[sss12]

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.

I agree with your overall point. But, on your option example, if you had ATM options and your underlying is up 50% your option is up way more than 100%.

 

[Windlesham1]

Because I love deep in the money calls lol?.... and because I mentioned a strategy to avoid the spread? How does that have anything to do with a bear market lmao.

I understand we are in a bull market... a bear market could whipe out no more than 10-20% of my account because that's all I have at risk and my deep itm calls are leveraging my entire account+ More. If a bear market comes, I sit and wait. Roll my options out with the massive pile of cash I have on hand and load up on commons. .

for example, with 100k, I only have to risk about 15-20 grand at any given time to control about 100k-150k worth of shares or more, and I keep the other 75-80 k cash. It's not rocket science. I don't know why everyone is saying 50% of the stock value and comparing to margin. That's why this whole margin argument is wrong. I never pay 50% of a stock price when using deep itm calls. Never. That argument only works if you are buying calls at 50% if the stock value. Who the fuck does that. Thanks tho.

Fair comment, but buying the dips may wipe you out one day Sunshine! When volatility comes back your costs will be increased dramatically, you will be paying big for tiny gains as you know as well as I do that vol plummets when the market rises-but you need vol there in the first place-so well done with deep ITM calls. FYI the FTSE100 ITMs have zero time value thanks to QE. I think the indexes are a much better trade because with stocks you only need one CEO to get caught with Kevin Spacey or someone else's wife and you lose big time. I've never had a drawdown of more than 0.5%. Happy trading

 

[newwurldmn]

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.

Everytime I study this I come to the conclusion it's better to buy the stock on margin than to buy a ditm option as a proxy.

The big reason is that option premiums aren't marginable under reg-t so for the same delta risk you tie up more capital.

And then you have bid offer issues and have to worry about dividends.