Simple Question

heavenskrow

heavenskrow

Let's say your max risk on a trade was $100.
Based on your analysis, you believe X will trade around or below 115 by April 20th.
There is an OTM April 20 115 option for $100.

If your comfortable with knowing you can lose $100 and be fine with it based on the total risk of your portfolio, is it okay to buy it? Or is it smarter to buy an ITM put??
 
If max risk was 100, then the option needs to trade for 1$, not 100$. Also, you need to mention the current underlying price and the IV. Not possible to answer without that.
At the very least, one is not necessarily smarter than the other. It depends on how much directional exposure and how much time decay you are willing to tolerate
 
heavenskrow said:
Let's say your max risk on a trade was $100.
Based on your analysis, you believe X will trade around or below 115 by April 20th.
There is an OTM April 20 115 option for $100.

If your comfortable with knowing you can lose $100 and be fine with it based on the total risk of your portfolio, is it okay to buy it? Or is it smarter to buy an ITM put??
More...


I would go with the OTM options, they provided more bang for your buck. The ITM options could be twice as expensive and still go to zero.




:)
 
Victor123 said:
If max risk was 100, then the option needs to trade for 1$, not 100$. Also, you need to mention the current underlying price and the IV. Not possible to answer without that.
At the very least, one is not necessarily smarter than the other. It depends on how much directional exposure and how much time decay you are willing to tolerate
More...

Right, it is trading for $1 but you know, its still $100 in terms of cost
IV is 30% and current price is $127.
 
heavenskrow said:
Right, it is trading for $1 but you know, its still $100 in terms of cost
IV is 30% and current price is $127.
More...
Hmm..it seems quite a bit to pay 1$ for the OTM option...since they are so far OTM. Considering that IV is not that high, and the expiry is in the front month, I don't see how this option can have 1$ of time value? That should be the first question before figuring out what to buy?
Is a very large dividend expected or something?

Buying so far OTM option is a gamble, you need a big move for the option to be profitable. If you are fairly comfortable that a downmove will happen, then buy the OTM since it will be cheaper. But remember, the downmove needs to happen fast or else the 100$ will start decaying. I imagine the theta decay is quite high for this option?
 
Victor123 said:
Hmm..it seems quite a bit to pay 1$ for the OTM option...since they are so far OTM. Considering that IV is not that high, and the expiry is in the front month, I don't see how this option can have 1$ of time value? That should be the first question before figuring out what to buy?
Is a very large dividend expected or something?

Buying so far OTM option is a gamble, you need a big move for the option to be profitable. If you are fairly comfortable that a downmove will happen, then buy the OTM since it will be cheaper. But remember, the downmove needs to happen fast or else the 100$ will start decaying. I imagine the theta decay is quite high for this option?
More...

its the AAPL April 24 116 strike.

My friend who also trades options, normally only buys a lot of OTM calls/puts but I normally buy ITM because I normally do not want to lose the whole value... However let's say I am comfortable with losing $100 knowing it could be worthless at time of expiry, is it better to buy the OTM strike for $100 or should I buy an ITM put?
 
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Look at the delta of the 115 put. That is your rough estimate of whether your option will be ITM at expiry. If you are ok with that probability, then you can buy the OTM put.


As of now, the delta is ~.32, means approximately there is a 32% chance you will end up ITM and 68% chance that you will lose your 100$. How is that for a guide?
 
Victor123 said:
Look at the delta of the 115 put. That is your rough estimate of whether your option will be ITM at expiry. If you are ok with that probability, then you can buy the OTM put.


As of now, the delta is ~.32, means approximately there is a 32% chance you will end up ITM and 68% chance that you will lose your 100$. How is that for a guide?
More...
Reminder, that guide only applies to expiration. Profitability can come along at any time prior to expiration as well.
 
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