Deep In The Money (DITM) Call Options with a Delta 1 (or very close): Why not always do this instead of buying the stock directly?
There is the downside:
1) You own an option not stock, so no voting rights.
2) You likewise do not get dividends.
3) The contract price is too high (100x a position like BRK.A has rendered the number of options on them available as... none..)
4) If there are other perks (rare) in owning the stock, you don't get them.
But are there any other downsides? Because the upside:
1) At delta 1, if the stock goes up 1$ your option goes up 1$
2) If the stock drop below your strike price you've capped your loss
3) Since you are paying for an option, the price is going to be less than the stock itself: This translates to leverage.
For example, AMZN 20-JAN-17 Call @ 270 is trading at 251 (AMZNA201727000.U) with underlying price at 518.01 (at time of this writing).
This translate to a delta of 99.0990 and a leverage of 2.0452.
Or basically, you can own the equivalent of two times of stock for the price of one and in this case pay very little premium for the benefit of doing so. (Or expend half the amount of cash to control the same amount of stock).
As opposed to buying on margin, you don't have to worry about a margin call (or pay the interest rate).
If the stock crashes to below 251$ your option becomes worthless (but this is the same as buying the stock at 518$ and watching it drop to below 251$.) For example:
Buy Stock @ 518$, drops to 250$ = Paper Loss of 260$
Buy Option @ 251$, underlying drops to 250$ = Actual loss of 251$
However, since you only paid 251$, the difference (518-251) = 267$ could then be used to buy the stock at 250$ putting you at the same net position.
Of course if it drops even further you're saved by the maximum loss.
And if the underlying price goes up, you would profit at a 1:1 ratio (almost).
(And so far, I haven't discussed any of the additional benefits one could have from this strategy, such as hedging, writing calls, or investing the saved cash risk-free)
So then the question really comes down to:
Why not always buy stock options instead of the underlying position (except for the reasons listed above).
There is the downside:
1) You own an option not stock, so no voting rights.
2) You likewise do not get dividends.
3) The contract price is too high (100x a position like BRK.A has rendered the number of options on them available as... none..)
4) If there are other perks (rare) in owning the stock, you don't get them.
But are there any other downsides? Because the upside:
1) At delta 1, if the stock goes up 1$ your option goes up 1$
2) If the stock drop below your strike price you've capped your loss
3) Since you are paying for an option, the price is going to be less than the stock itself: This translates to leverage.
For example, AMZN 20-JAN-17 Call @ 270 is trading at 251 (AMZNA201727000.U) with underlying price at 518.01 (at time of this writing).
This translate to a delta of 99.0990 and a leverage of 2.0452.
Or basically, you can own the equivalent of two times of stock for the price of one and in this case pay very little premium for the benefit of doing so. (Or expend half the amount of cash to control the same amount of stock).
As opposed to buying on margin, you don't have to worry about a margin call (or pay the interest rate).
If the stock crashes to below 251$ your option becomes worthless (but this is the same as buying the stock at 518$ and watching it drop to below 251$.) For example:
Buy Stock @ 518$, drops to 250$ = Paper Loss of 260$
Buy Option @ 251$, underlying drops to 250$ = Actual loss of 251$
However, since you only paid 251$, the difference (518-251) = 267$ could then be used to buy the stock at 250$ putting you at the same net position.
Of course if it drops even further you're saved by the maximum loss.
And if the underlying price goes up, you would profit at a 1:1 ratio (almost).
(And so far, I haven't discussed any of the additional benefits one could have from this strategy, such as hedging, writing calls, or investing the saved cash risk-free)
So then the question really comes down to:
Why not always buy stock options instead of the underlying position (except for the reasons listed above).
