might it ever happen where buying deep OTM calls will make you more money than ATM or ITM?
- Thread starter IronFist
- Start date
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.
Maybe my ToS calculations were off.
I performed the math with SNDL by buying an equal dollar amount of stock, ITM ($0.50) calls, and $5 calls or something.
Past I think $6, the ITM calls were worth the most.
I could have to do it again.
So you're saying a bunch of like $6 January 24 calls will be worth more than the same dollar amount of $0.50 calls if price goes to 8 or 10 or 20 or 50?
I'd do it now but I only have ToS web (chromebook) and can't do it now.
I performed the math with SNDL by buying an equal dollar amount of stock, ITM ($0.50) calls, and $5 calls or something.
Past I think $6, the ITM calls were worth the most.
I could have to do it again.
So you're saying a bunch of like $6 January 24 calls will be worth more than the same dollar amount of $0.50 calls if price goes to 8 or 10 or 20 or 50?
I'd do it now but I only have ToS web (chromebook) and can't do it now.
Yeah, I think in invested dollars. I want to spend the least and make the most.
Can you detail this? Collaring a stock? Say I have a big SNDL position. I do. I'm very bullish. I am. Why would I invest premium and buy puts if I'm bullish?
Let's use SNDL again. Say you're starting today.
If you think price will get to ONE DOLLAR, would it be better to:
1) buy $1000 worth of shares today
2) buy $1,000 worth of $0.50 24 Jan calls
Let's see
Value is $.43. Your $1000 gets you 2325 shares. If this makes your price target you get 2325 * .57 = $1,325
Ok that's pretty cool.
24 Jan 0.50 calls are .24. So you could buy 40 of them.
If price gets to $1 you make $1029. More if it happens sooner.
Ok so at this point, the shares are worth more.
what if you think price will get to $2?
Your shares will be profited $3,650.
Your calls are $5042.
They are worth more.
THEREFORE PAST A CERTAIN AMOUNT, ITM (OR IN THIS CASE BARELY OTM) CALLS ARE GOING TO GET A HIGHER PROFIT.
I cannot really go past $2 here because I'm using ToS web and I can't change the chart.
If you think price will get to ONE DOLLAR, would it be better to:
1) buy $1000 worth of shares today
2) buy $1,000 worth of $0.50 24 Jan calls
Let's see
Value is $.43. Your $1000 gets you 2325 shares. If this makes your price target you get 2325 * .57 = $1,325
Ok that's pretty cool.
24 Jan 0.50 calls are .24. So you could buy 40 of them.
If price gets to $1 you make $1029. More if it happens sooner.
Ok so at this point, the shares are worth more.
what if you think price will get to $2?
Your shares will be profited $3,650.
Your calls are $5042.
They are worth more.
THEREFORE PAST A CERTAIN AMOUNT, ITM (OR IN THIS CASE BARELY OTM) CALLS ARE GOING TO GET A HIGHER PROFIT.
I cannot really go past $2 here because I'm using ToS web and I can't change the chart.
So, I am using ToS. Is their computation algorithm mistaken?
Because you don't bet on the stock here, you bet on the implied vol of the LEAP.
SNDL is a 40ct stock and you pay 23 cts for the 50cts call strike at 117 IV.
Meaning you pay half the price of the stock for an option...which has to double for your LEAP to reach break even price. But that's only half the story.
Yesterday this very 50cts LEAP traded at 157 IV and the option was worth 34cts. The stock did basically nothing but you still lost over 10cts due to implied vol going down.
If I were you, I'd just trade the stock. You don't save anything and you don't gain anything from trading the LEAP except two additional risk dimensions you have to worry about.
Even if you looked at the option from your utter newbie point of view, you don't even get much leverage...the LEAP is almost as expensive as the stock itself. If you bought that call yesterday, you would have saved 6cts (which you probably paid in commissions)
I don't know about your real intentions but LEAPs for this particular stock is just a plain stupid play.
It is generally better (like always) to lower P/L volatility, improve risk reward and increase leverage. If you risk 100$ to gain 400$, you better turn that 1:4 into a 1:8 (meaning you risk 50$ to make 400$) and double your bet (risk 100$ to make 800$)
If that means you have to cap your upside at 1:20 to cut your downside in half, it's well worth it. But it looks like you want a fire and forget gamble and not get into the deep end.