When does it make sense buying Calls ITM ?
- Thread starter thecoder
- Start date
I rather buy OTM . You will often make higher % gains on OTM calls if your right on the direction. I see a ton of traders take ITM calls for 10%-20%+ but if they just took more contracts OTM they would've gained 50%-100%+
I don't really understand that thought process but not gonna question it much. I guess it's just a matter of preference and trading style!
I don't really understand that thought process but not gonna question it much. I guess it's just a matter of preference and trading style!
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%%
THAT DEPENDS;
on how good you are with trends + timing of trends, which explains why so few option buyers make money.
I seldom collect on insurance which explains why i insure some, but not all stuff myself.......................................................................................................
"When does it make sense buying Calls ITM ?
Isn't one then risking more than is necessary?"
I would say the basic answer is it is the closest "synthetic" to just buying the stock. The difference being the option allows you to control 100 shares a lot cheaper than buying 100 shares . Also the cost is determined by how much intrinsic value is in the option so the option buyer sets that cost or risk when choosing the in the money strike price. The on the money options always have the highest premium in the option chain so if one was trying to not have to pay so much premium, they could buy an in the money option (or out of the money,)
The in the money is more risk (more expensive) as one is buying the intrinsic value in the option price, (max loss is price paid for option) but they are paying less premium in the option price compared to the on the money option. So they have lowered premium risk.
It works like this:
375.0 Call
63.00 - 12 intrinsic value - 51.00 premium
380.0 Call
60.00 - 7 intrinsic value - 53.00 premium
385.0 Call
57.50 - 2 intrinsic value - 55.50 premium
stock at 387
390.0 Call
54.50 - 0 intrinsic value - 54.50 premium
395.0 Call
52.00 - 0 intrinsic value - 52.00 premium
400.0 Call
49.50 - 0 intrinsic value - 49.50 premium
Let's say you buy the 390 call for 54.50 . Stock moves to 400.
Prices adjust to intrinsic values and premium values.
375.0 Call
70.00 - 25 intrinsic value - 45.00 premium
380.0 Call
67.00 - 20 intrinsic value - 47.00 premium
385.0 Call
64.50 - 15 intrinsic value - 49.50 premium
390.0 Call
61.00 - 10 intrinsic value - 51.00 premium
395.0 Call
58.00 - 5 intrinsic value - 53.00 premium
stock at 400
400.0 Call
55.50 - 0 intrinsic value - 55.50 premium
You call is now worth 61. You paid 54.50 your profit is 6.50
If you bought the in the money call with less premium in it's price:
Bought the 375 call instead of the 390:
It's now worth 70 and you paid 63 your profit is 7.00
So you made .5 more on the same move by buying in the money option. Doesn't seem like a lot but if one was trading 20,000 options it would be an extra $10,000, But then the most you could lose on the 389 call is 54.50. The most you could lose on the 375 call is 63.00 More risk = more reward or more loss.
I would also add people buy the calls in the money for other strategies as well. Like buy the in the money, stock moves up, sell the on the money make it a spread. with fixed profit. Buy less. premium, sell more etc.
Like buy the 380 for 60
Stock moves to 400
Sell the 400 call for 54.50 making it a spread
stock stays above 400 your profit is 14.50 double what you got buying 70 alone. But then spread profit can't go above that. The 70 has unlimited profit. Lot's of options!
Isn't one then risking more than is necessary?"
I would say the basic answer is it is the closest "synthetic" to just buying the stock. The difference being the option allows you to control 100 shares a lot cheaper than buying 100 shares . Also the cost is determined by how much intrinsic value is in the option so the option buyer sets that cost or risk when choosing the in the money strike price. The on the money options always have the highest premium in the option chain so if one was trying to not have to pay so much premium, they could buy an in the money option (or out of the money,)
The in the money is more risk (more expensive) as one is buying the intrinsic value in the option price, (max loss is price paid for option) but they are paying less premium in the option price compared to the on the money option. So they have lowered premium risk.
It works like this:
375.0 Call
380.0 Call
385.0 Call
stock at 387
390.0 Call
395.0 Call
400.0 Call
Let's say you buy the 390 call for 54.50 . Stock moves to 400.
Prices adjust to intrinsic values and premium values.
375.0 Call
380.0 Call
385.0 Call
390.0 Call
395.0 Call
stock at 400
400.0 Call
You call is now worth 61. You paid 54.50 your profit is 6.50
If you bought the in the money call with less premium in it's price:
Bought the 375 call instead of the 390:
It's now worth 70 and you paid 63 your profit is 7.00
So you made .5 more on the same move by buying in the money option. Doesn't seem like a lot but if one was trading 20,000 options it would be an extra $10,000, But then the most you could lose on the 389 call is 54.50. The most you could lose on the 375 call is 63.00 More risk = more reward or more loss.
I would also add people buy the calls in the money for other strategies as well. Like buy the in the money, stock moves up, sell the on the money make it a spread. with fixed profit. Buy less. premium, sell more etc.
Like buy the 380 for 60
Stock moves to 400
Sell the 400 call for 54.50 making it a spread
stock stays above 400 your profit is 14.50 double what you got buying 70 alone. But then spread profit can't go above that. The 70 has unlimited profit. Lot's of options!
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I just realized I left out an another one:
Say the stock is at 400:
1 person buys the on the money 400 call for 55
1 person buys the in the money 375 call for 70
Say both people hold the calls till expiration day and the stock ends at 400.
The person who bought the 400 has a loss of 100% - 55.00
The person who bought the 375 has a loss of 45.00
This is basically getting into the greeks, Delta, gamma, vega, How the option price changes based on the underlying.
Say the stock is at 400:
1 person buys the on the money 400 call for 55
1 person buys the in the money 375 call for 70
Say both people hold the calls till expiration day and the stock ends at 400.
The person who bought the 400 has a loss of 100% - 55.00
The person who bought the 375 has a loss of 45.00
This is basically getting into the greeks, Delta, gamma, vega, How the option price changes based on the underlying.
Can you check it again pls, b/c I think your above statement is not true as ITM should (always) be >= ATM.
You are right. Thanks for catching that. I'll see if I can edit those words and fix them. I should have said time value., not premium. When I was taught options my teacher always called time value premium so messed up my thinking lol.
"Time value is at its highest level when an option is at the money because the potential for intrinsic value to begin to rise is greatest at this point. Time-value decreases as the option gets deeper in the money; intrinsic value increases."
EDIT: Oh I can't edit the post must be a time limit on editing. Yes premium means the entire cost of the option. The cost of option is intrinsic value + time value. I was using the word "premium" as slang for time value which is wrong.
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