Deep ITMC Question

D

davewolfs

Quick question for everyone and I don't normally trade options so please be nice.

If my interest is purely to leverage a position with less capital and I am trading intraday swings, aside from slippage what are the risks of purchasing deep in the money call or put options rather then stock? I understand that volatility, time decay and other factors plays a significant role in the pricing of an option, but if my stock moves by $x can I expect the option to move in similar fashion?

Thanks,

Dave
 
Quote from davewolfs:

Quick question for everyone and I don't normally trade options so please be nice.

If my interest is purely to leverage a position with less capital and I am trading intraday swings, aside from slippage what are the risks of purchasing deep in the money call or put options rather then stock? I understand that volatility, time decay and other factors plays a significant role in the pricing of an option, but if my stock moves by $x can I expect the option to move in similar fashion?

Thanks,

Dave
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I'm sure you'll get better replies but generally yes to your assumptions. As long as the option is far enough ITM (say .70 to .80+ delta) then vol and theta change will be minimal or non existent intraday and you'll only have to worry about not so great spreads in return for greater leverage on your money.

And as implied by the delta you can generally expect that much movement compared to the price of the underlying (ie, xyz moves X points, option moves delta*X points), the higher the delta the closer the relationship and the worse the spread.
 
As mentioned in the first reply you received, in general, yes.

Deep ITM options tend to have wider spreads so slippage is usually more of an issue with them. The most bang for the buck per round lot (option vs stock) is with the underlying.

Time decay is irrelevant intraday.

Premium is linear with respect to underlying price in terms of lower vs higher priced stocks when all other factors are constant. IV change will be your issue.

If trading intraday, you want the nearest expiration since it will have a higher delta than a further term same strike. It will also react the least to change in implied volatility (good if IV rises, bad if it drops).

So in terms of price and IV, if you're trading near month high delta options with low IV, intraday IV change will be cents. OTOH, if you're trading near month high delta options with high IV, intraday IV change could be nickels and even dimes.


And for the short answer as to what is the main risk the risks of purchasing deep in the money call or put options rather than stock? You get the direction wrong :)
 
Thanks for the replies everyone I appreciate it.

Are there any free sites that will show what the delta, vega and implied volatility are for an option? Possibly even historical volatility or is this something that I have to calculate?

Also, any recommendations on a introductory options strategy book, I have read part of the volatility edge but some of the options models seem advanced for someone who is new to the subject.
 
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