why trade ATM options vs OTM

M

met1989

i have been trading on a demo account for a long time and now its been a month that im in the real money which is going good, but i though of an idea why should i buy a ATM option that costs 3* more then an option OTM with the same expiry date ? if my goal is to just wait for the value of the option goes up so it will also go up if the market moves up 1% or 2% and my risk and exposure is much less then buy-in ATM options what do u guys think about ?
 
Robert Morse said:
ATM, and just ITM options are a stock replacement strategy while OTM options are more of a wish looking for a home run. You can be right on stock direction and still lose money with OTM options.
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But it will still go up in value of the stock moves up 1%
 
Not always. Depends on time decay. If you buy options out 6 months, yes. If you buy a $0.10 options with 1 week to go, maybe not. All I can tell you is that the strategy of buying OTM calls over time is a loser. You might get lucky a few times, but the discipline to exit the option when not working is hard. You will say, it is just 3 cents now, why sell..... Just my opinion. The opinion of an X-market maker with 25 years of professional option trading and 37 years in the business.

I personally like buying just IMO puts or calls vs the stock, as long as the options are liquid with narrow spreads, as I do not feel like I need stops in place, just an exit plan. You still have to avoid the impulse to over lever. I would replicate the same amount of deltas I want and stick to short time spans.
 
met1989 said:
i have been trading on a demo account for a long time and now its been a month that im in the real money which is going good, but i though of an idea why should i buy a ATM option that costs 3* more then an option OTM with the same expiry date ? if my goal is to just wait for the value of the option goes up so it will also go up if the market moves up 1% or 2% and my risk and exposure is much less then buy-in ATM options what do u guys think about ?
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Most OTM options are lottery type plays. It looks good on paper each time you make a profit because of the huge gains however, what about the numerous other times you fail? This is a game of percentages just like in baseball. A batter hitting .300 wouldn't seem to much of a hitter but, he is a pretty good hitter. Very few batters hit .300. So, he swings and misses on 7/10 times he goes to bat. By analogy, your OTM batter hits .100 which means he misses on 9/10 times he goes to bat. A trader probably, puts on hundreds of trades on a given year. In my case, I probably, have 300 trades a year. About half of them 150 trades will be losers. I mostly, buy ATM or ITM options. If I were to buy the lottery types of trades, my win percentage would go down to maybe, 50 trades out of 300 or 20%. That act alone probably, will put me in the red. Am I trading to make monies or to just lose my monies? If you maintain a trading journal, you should be able to track how badly, you do with the OTM lottery type of trades. It looks good the few times you make out like a bandit but, most times, you will feel like having been robbed by bandits yourself most of the other times!
 
smallfil said:
Most OTM options are lottery type plays. It looks good on paper each time you make a profit because of the huge gains however, what about the numerous other times you fail? This is a game of percentages just like in baseball. A batter hitting .300 wouldn't seem to much of a hitter but, he is a pretty good hitter. Very few batters hit .300. So, he swings and misses on 7/10 times he goes to bat. By analogy, your OTM batter hits .100 which means he misses on 9/10 times he goes to bat. A trader probably, puts on hundreds of trades on a given year. In my case, I probably, have 300 trades a year. About half of them 150 trades will be losers. I mostly, buy ATM or ITM options. If I were to buy the lottery types of trades, my win percentage would go down to maybe, 50 trades out of 300 or 20%. That act alone probably, will put me in the red. Am I trading to make monies or to just lose my monies? If you maintain a trading journal, you should be able to track how badly, you do with the OTM lottery type of trades. It looks good the few times you make out like a bandit but, most times, you will feel like having been robbed by bandits yourself most of the other times!
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well said.
 
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