might it ever happen where buying deep OTM calls will make you more money than ATM or ITM?

[Baozi]

So, I am using ToS. Is their computation algorithm mistaken?

for sure their algorithm works, but probably the web version you are using is just showing you the terminal payoff. You should be able to visualize the profit curve at various points in time and under different volatility levels.

 

[MrMuppet]

I took an hour to run the numbers on thinkorswim to see which way I would make the most money if price goes to 5 or 6 or beyond.

$0.50 options were the choice.

What can I do to get better numbers, be asue it seems from this thread that is wrong.

Before you use a blackbox to make decisions for you, use your brain first.

It seems you don't have much knowledge in options and you want to use them as a simple above/below strike bet.
Well then, if you have a simple approach, use a simple valuation method.

If you buy a house for 1M and the insurance on that house costs you 750k for 2 years, wouldn't you rather just go without insurance...or buy a second house?

I cannot understand why it is not obvious to you that buying a 25cts option on a 40cts stock is insanely stupid. Imagine paying 100$ for an ATM MSFT LEAP, you would not do that.
Yet you ask the magic black box to tell you that you would make the most profit...and you believe it.

It's not about the numbers, you neiter understand the options nor the asumptions behind ToS model. Is volatility kept constant? Is it only looking at terminal distribution? Is it comparing by looking at VaR? How does ToS come up with it's results and how relevant are they for your trade?

Just buy the stock. It's an option in itself. It IPOd in 2019 at 13$ and sits at 40cts right now. 1b valuation and 200m burn p.a. Just buy it and forget about the option....because when you're wrong, you can probably cash out at 30cts 6 months from now, but when you buy the option at 30cts and IV goes down to 50% your option might be selling for less than 10cts.

 

[IronFist]

Like, I can advance the day on the web version. I was going by the expiration date. But even tomorrow, which I believe is the highest possible value, it was worth less than the $0.50

 

[IronFist]

The crucial mistake you're making here is the fact that you think in invested dollars.
"Am I better off investing 100$ into ATM or ITM or is it better to invest 100$ into OTMs?"

You cannot do that. Simply put if the stock rallies to 100$, you're way better if you invested into OTMs vs ATM or ITM, just because you have more options. 60x80 is more than 1x97...makes sense?

The question you have to ask yourself: Where do I think the stock will end up at before my options expire. You'll have a lot of busted OTMs but when you hit, you'll strike big. With ATMs you'll have less expired options but you won't make as much.

There is a reason why options are priced off of a return distribution which in turn can be modulated to probability of strike touch or expiration in the money.

If you are long term bullish, the best thing you can do is collaring your stock, meaning you sell a call and invest the premium into a downside put. This will reduce your P/L volatility by a significant amount so you can leverage more.

This, however, depends a lot on how good you are with options, so I suggest you invest some time into understanding the basics.

IMHO it was never a good idea to buy outright options unless you have a view on volatility. Options are always priced with a premium to realized vol so you'll always overpay unless you spread of your risk.

Can you explain how being bullish is selling calls? Let's say I have 1,000 shares. Ok, so I sell 10 calls and then use the money to buy puts. This guards me if the price goes down, BUT limits my upside and I forfeit the cash from the calls if price goes up. Recall, you said this was bullish.

 

[MrMuppet]

Can you explain how being bullish is selling calls? Let's say I have 1,000 shares. Ok, so I sell 10 calls and then use the money to buy puts. This guards me if the price goes down, BUT limits my upside and I forfeit the cash from the calls if price goes up. Recall, you said this was bullish.

How is that not bullish?

Forget about your upside limit...I mean what is realistic here? With this trade above you get a 3:1 when the stock doubles within 60 days. On top of it, when you're wrong, you'll lose even less than 1$ provided you cut the loss quickly. When you're right, though, you can relax since you'll actually receive time premium (theta) instead of paying.
So actually it's more of a 6:1, but ok...let's stay with 3:1 to compare.

Simple long call here, costs 0.75 cts which is the risk. A 3:1 would be a profit of 2.25 which is reached as soon as the stock gets to 6 dollars at expiration. At 6$ the collar would net you a profit of 3$ already so for the naked call, the stock has to get to 6.75 for the same result.


If you trade the collar in the first example correctly, e.g. you have an exit price on the stock and you cut the loss after let's say 10 days because the price has been triggered, you only lost 25cts instead of 1$

So knowing this, you could trade four of these for the same risk...but your reward goes to 12$ when the stock hits 6$

As soon as you buy the call, you are in a losing position, because the option decays every day. You cannot buy 4 of these and hope to be able to get out of the position a loss of 1$, because you're also long volatility....and when vol drops, your long call loses value, although the stock didn't move a cent.

If you don't have much option knowledge and you have an option on the stock and none on vol, ALWAYS trade vertical spreads or collars. (for the experts: yes, verticals have vanna and skew exposure but these effects are miniscule compared to delta)


That said, this above is not true for SNDL LEAPs. You'll pay more in commission than you receive in premium for the short call...and you pay almost as much for the long call as the stock is worth. You're bullish? Buy the stock

 

[notagain]

NQ will rally in July, 10700 is the trigger price at the 200 week SMA.

 

[nooby_mcnoob]

I'm focused on deep OTM calls vs ITM calls vs. stock outright for far dated expirys.

Based on my calculations, ITM calls are worth the most, potentially, past a certain price, in each circumstance.

Said separately, there is a price after which price rises beyond it that ITM calls will be worth more than everything else possible, even stock outright.

It's a simple formula. Just plot the payoffs and eyeball it.