ATM: slightly OTM or slightly ITM?

I have a strategy for buying ATM options. I hold the options for a few days whilst I expect the underlying and/or IV to go in my favour.

I buy ATMs because they have decent Vega and Delta. However I have a dilemma on whether to buy ATMs that are slightly ITM or slightly OTM. Based on my calculations and observations slightly OTM will usually have a bigger payoff when things go in my favour. Since I am only holding for a few days Theta is not a big issue as long as the expiry is not too close.

Here is an example of my logic from a call option:

slightly ITM Strike: Price = 5.20 Vega = 0.03 Delta = 0.885
slightly OTM Strike: Price = 1.46 Vega = 0.058 Delta = 0.507

Based on these prices and greeks a 10% increase in IV would results in a price increase as follows:

ITM strike = 5.2 + 0.3 = 5.5 (increase of 5.7%)
OTM strike = 1.46 + 0.58 = 2.04 (increase of 39.7%)

If the underlying goes up 1 point:

ITM strike = 5.2 + 0.885 = 6.085 (increase of 17%)
OTM strike = 1.46 + 0.507 = 1.967 (increase of 34%)

So does my reasoning and calculations make sense? It seems to pay to buy slightly OTM. Of course the closer you get to expiry the more effect Theta has and the larger the risk of losing all extrinsic value if the IV and underlying don't go in my favour.
Also if the IV/underlying go against me, I lose value much faster.

 

Which ever one provides the narrower markets with the depth you need.

 

OTM options, as a rule, offer more leverage... Apart from the calcs you've done, have you looked at what the vols are on the two options you're comparing?

 

I prefer just ITM. If the swing goes your way, the sooner the P/L turns green.

 

OTM will give you a greater profit in terms of percentage. So it's really up to you.

 

Not if you make money less often. You have to include expectancy.

 

Very valid point indeed.

 

You're comparing apples w pears.

A slightly ITM doesn't have a Delta of 90... that's deep. Generally speaking, the x% ITM has the same vega/theta as x% OTM... (not quite due to skew).

Longer dated options have higher vega, although the IV's move less than shorter term.
And vega is higher for stocks with a higher value...
Remember, vega is in points, not %. So vega of 0.03, means 3 cents increase when IV goes up by 1 point.