Deep ITM calls

Quote from droid17:

Hi all :)

I have been reading a book about buying deep ITM calls as an alternative to buying the stock. Basically It suggests buying as deep as you can with a delta over 90%.

The author argues that you are getting the same benefit of owning the stock with about half the cost. My questions are do you guys like this strategy? Second the author didn't really go into how far out you should buy these calls, what do you guys suggest is a decent time out?

Thanks,

Droid
More...

This is a great strategy only after you got really good at picking the direction of the market in your particular time frame.

I usually play 15-45 days out Calls and Puts. For me this is because I'm comfortable with my directional biased picks for a hold time of wk - 1 month.

But the rule generally is, Whatever your time frame you prefer just add one month. The last month decay just gets sucked out so fast for Longside options.
 
Nice thanks for the responses :) So I was looking at the bid ask spread concern, and see what you guys are talking about in particular with the deep far out ones. So what is the best way to get a decent price? I am assuming market orders are a no go. Just put a limit in and hope?


Thanks,

Droid
 
for the deeps you can also just put in an order 5 ticks over the underlying ( assuming the put is around 5 ticks). This will be better than mid-market and market makers will probably fill you as they get the carry.

And again even if you paid 10 ticks over the underlying, it is probably better to do the deeps than the underlying.
 
If you are able to sit and fiddle with your orders, it makes sense to split the bid/ask and maybe even try to shave a little bit off that. If you're not filled right away, you can just keep tweaking it every so often until you are filled. It all depends on how "hands-on" you want to be.
Depending on contract size, you could also split your order up and try to cost average to a better price (hit the ask for some, ask-$0.10 for some, etc).

The ThinkorSwim platform defaults to splitting the bid/ask, and I usually leave it at that. I don't typically trade really DITM options, though, so perhaps this won't work as well.
If you don't want to futz with it, set a limit order and let it go.
I typically enter options positions after a price trigger (i.e: Buy this put above $50, or whatever). In that case, I use a stop-limit with a bit of a buffer on the limit (say +0.10 or so). This minimizes my slippage but allows me to get in the order (I'd rather get in with a slight amount of slippage than miss the boat completely).

Don't use a market order on the DITMs, though as you'll probably get whacked
 
Quote from traderlux:

I have not traded this myself, but I have also read a number of articles and book chapters (Lee Lowell) about DITM calls and it sounds good to me.
Interested to hear what some of the experienced traders have to say.
More...

It depends on the underlying. if you are going DITM on a high dividend yield instrument and are taking leaps (9+ months out). Then there is a good chance that you will have a smaller return wrt to the underlying itself.
 
These are two PAPER trades I opened yesterday and today just to do some testing buying deep ITM CALLS which have:

DELTA practically = 1
Extrinsic Value between 0 and 0.13

1) Bought one SLV MAR13 $14 Call for 19.20 (stock was at 33.21)

2) Bought one SLV JAN13 $19 Call for 14.35 (stock was at 33.22)

I'm no expert but wanted to try this because of the current uptrend in Silver and the DELTA which already a few hours after opening the trade has made them profitable.

Of course buying deep ITM calls means putting much more money at risk in premium.

As always any comments are appreciated. Thanks.
 
You must log in or register to reply here.
Back
Top