Deep in the money Options

[AMA]

Quote from FrankSlaughtery:

frost - i use a similar strategy. since i'd like to capture a large part of the "middle move" (not top or bottom) i want higher rather than lower deltas but the spreads are usually so wide that it gives up a substantial portion of profit (or adds to losses!). so i stick to between .5 and .75 for delta. be careful buying calls w/ a lower delta (.5 rather than .9 or .95) b/c the iv drop will kill the option premium if the UL rises as you expect it to.

you're correct that since you're only holding for a few trading days you won't lose much time premium. but never do this buying the front month unless you have at least 2 weeks until expiry and then it's still risky b/c the theta bleed is exponential. i'd suggest going out another month (front+1).

another suggestion (not telling you how to trade just advice) is if you're only buying calls what happens when the black swan hits - how will you protect yourself? try placing a small amount of your port (10-20%) in otm dia puts. you'll take a loss on these most of the time but the one time that the market gaps down 10% b/c of whatever you're going to be glad your account is mostly intact instead of wiped out.

if you have any other suggestions for me (or anyone else) pls post them so we can all improve.

Excellent points. Particularly about buying some OTM protective options. Note that OTM, when they hit their sweet spot, -rapidly- appreciate, and if done in a type of ratio position, can help offset the loss in your deep options. 'course, between the vast spreads on deeps and the cost of cheap protective options, there goes your edge...

What you oughta do is subscribe to a live quote feed service, bring up some option chains and observe over time what -actually- happens. It will be different than what you think.

Another way of viewing this is that if this were a fabulous stategy, everyone would be doing it...but, they're NOT.

Understanding appreciation/depreciation of different strikes goes a LONG way towards validating(or rejecting) strategies that look wonderful late at night while you're trying to go to sleep

 

[KPS21]

frost -

Trading ITM options for leverage is not a great plan. The transaction costs are just too large compared to the DOW 30 stocks which are very cheap to trade.

Just trade the individual stocks - and if you can't take positions in every signal, it's not a big deal. If your strategy has that much edge, you will have enough money to trade all the signals in a reasonably short period of time. What is the hurry?

Alternatively, raise capital. It is hard enough to win trading stock without multiplying your tx cost by several times.

kps