Can an OTM option ever be profitable if it never goes ITM?

U

union1411

The reason I ask is because of IV. My guess is that if IV skyrockets for whatever reason, it would seem that the OTM option's value would jump and perhaps create a profit even tought it's still OTM.




(Sorry for the newbie questions, but hey, who better to ask than all of you.)
 
Quote from union1411:

The reason I ask is because of IV. My guess is that if IV skyrockets for whatever reason, it would seem that the OTM option's value would jump and perhaps create a profit even tought it's still OTM.




(Sorry for the newbie questions, but hey, who better to ask than all of you.)
More...

Yes it can be. IV jump is one reason. Also the underlying can move in your favor, thus making an OTM option profitable, even though it may still remain OTM.

It doesn't matter if you buy(sell) an OTM, ATM or ITM option, as long as you can sell(buy) it for more(less) than you bought(sold) it for you have a profit.
 
Quote from union1411:

The reason I ask is because of IV. My guess is that if IV skyrockets for whatever reason, it would seem that the OTM option's value would jump and perhaps create a profit even tought it's still OTM.




(Sorry for the newbie questions, but hey, who better to ask than all of you.)
More...

Not only can it be profitable, it's value can multiply by tenfold, or even much more. Ask those who bought GOOG 300 calls last week...
 
In your example where IV skyrockets and your OTM option goes up, you are probably long a put and the underlying goes down a sizeable amount, thus causing the IV expansion but it was the move in the underlying that was responsible.

Remember, your long call went down even though IV went up, but if the big move was an up move your long OTM call would probably go up even though IV would very possibly go down.

These variables in option prices are all interrelated, but in the end the more time to expiration and the bigger the move in the underlying is going to have the impact that moves the OTM.
 
The reason I find this interesting is that conceptually I always thought of an OTM option as being in a race against time to get to the strike price and beyond so as not to expire worthless. But now I see that that way of thinking is only correct if I want to exercise the option (of course there is the relationship between the greeks and time to exp, but that's another topic).
 
Quote from sundance86:

In your example where IV skyrockets and your OTM option goes up, you are probably long a put and the underlying goes down a sizeable amount, thus causing the IV expansion but it was the move in the underlying that was responsible.

Remember, your long call went down even though IV went up, but if the big move was an up move your long OTM call would probably go up even though IV would very possibly go down.

These variables in option prices are all interrelated, but in the end the more time to expiration and the bigger the move in the underlying is going to have the impact that moves the OTM.
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Are you saying - and if so, it makes sense - that an OTM can go even more out of the money (say the underlying going up while you own a put) yet because of an increase IV (assume there is a huge increase) then the OTM put actually becomes worth more?
 
Underlying up and IV down is the frequent situation since much of an increase in IV is related to fear (this isn't considering IV up ahead of a scheduled event like earnings or maybe a FDA report).

So in this case I would say that IV is a drag against the OTM option pricing that will have a bigger impact on put pricing because of the underlying direction.

I don't see how your example could happen, where a put could go up with the underlying going up because of IV going up which isn't what would normally happen, but if it did you would see the put not going down as much as it would have without the IV increase.
 
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Union 1411 said:

Are you saying - and if so, it makes sense - that an OTM can go even more out of the money (say the underlying going up while you own a put) yet because of an increase IV (assume there is a huge increase) then the OTM put actually becomes worth more?
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I once owned a KC (Coffee) Put when IV was deader'n a doornail. Coffee made a bit of a spike up then dropped about halfway back. My Put increased several hundred dollars. There is actually a formula for it if you want to review McMillian's watershed tome (Options as a Stratigic Investment - Gee, I am losing my mind but I'm pretty sure that's the name).

Peace and gtty,

Lar
 
Quote from union1411:

The reason I find this interesting is that conceptually I always thought of an OTM option as being in a race against time to get to the strike price and beyond so as not to expire worthless. But now I see that that way of thinking is only correct if I want to exercise the option (of course there is the relationship between the greeks and time to exp, but that's another topic).
More...

Simply look at Delta. If stock is at $55 and OTM $60 call is at .50 with a Delta of .15, when the stock moves up to $56 the 60 call will trade at .65, and so on.

Of course time decay (theta) is working against you, it will run from 1-5 cents per day.
 
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