Registered: Aug 2012
09-29-12 12:12 AM
I have never done this myself, but the obvious benefit to me other than you don't tie up all of your capital is the asymmetrical payoffs for an ITM call option.
What I mean is that a move upward in the underlying will result in the option gaining more than it would lose from a symmetry move downward of the underlying. This is because your time-value is increasing as you approach ATM in a bell-curve like fashion. Moreover, if you have a call option, a fall in value of the underlying will also increase the time-value of the option due to positive vega since a fall usually results in an increase in expected future volatility. This gives you extra protection on the downside.
The negatives are theta working against you for the small amount of time value you have and the wide bid-ask spreads. Plus, you need to be on top of all of these relationships.