I have a similar option dilema I have posted at the link below. Appreciate any help. thanks http://www.elitetrader.com/vb/showthread.php?s=&threadid=119407
Actually, no, an option that moves 1 for 1 with the underlying or close to it will be deep ITM, which means the leverage is relatively small. The formula for leverage is ((stock price * delta) / (option price)) - 1
short may have misunderstood the contract/stock difference. i'm thinking we're discussing 1 contract (100 shares)
A deep in the money play is basically leveraging a position on an easy level. Its like going to the bank borrowing money, paying interest on it, and leveraging a bigger position. Depending on how deep you go, an example would be putting up 30k and getting the same effect as putting on a 100k position. Most people will put up the 100k they were going to in the first place to have the effect of a 300k position. Its almost the same as going to the bank borrowing money and sizing up your position paying interest and premium on the money, just without the hastle .
DITM options although they may have a delta close to 1 still involve leverage....just look at the cost of any DITM option and then look at the cost of buying 100 shares of the underlying you can easily see the leverage involved. So they should be used wisely with regard to leverage. On the other hand you do reduce your downside risk with DITM options. Look at my previous MSFT example...... Let's say I wish to buy 100 shares of Microsoft. At $ 28.96 per share that costs $ 2896. Instead I can buy an April 15 Call for $1395 that has a current Delta of 1.00. Technically if MSFT goes to zero (although highly unlikely) I can lose $2896 whereas the option only loses $1395.