Deep ITM vs. OTM Options

Discussion in 'Options' started by erol, Mar 21, 2009.

  1. erol


    Is it better to be long deep ITM options over OTM options when you expect the price to move but not significantly?

    I understand ROI is lower & risk is higher, but my understanding is break-evens are lower as well, and you would be fighting against time decay.

    Is there a flaw in this strategy?
  2. Nanook


    Just ITM would be better but there are other factors to consider.

    "Which option to buy" is on page 3: Trading/article_040210_LongOption.pdf

    Other educational articles found here:
  3. shazam75


    deep in the money is better as you have delta and theta on your side.
  4. erol


    okay thanks, so I`m not crazy...

    I`ll do the above recommended reading on this as well.

  5. DITM, is not always better. Just because you are not paying high premium doesnt make it better. You need to look at the underlying of the option.

    If the underlying is a stable stock, and based on the bias you just want to trend it. Then yes DITM is better, you are basically increasing your leverage.

    On the other hand, if the underlying is a high risk fast moving stock (drys, etfc, leh(before it went boom boom), etc..) that did/will move 30-50% in a day. You are probably better of buying otm option, as it significantly reduces your risk vs ditm if the stock goes to 0. And still have a good chance of making a large profit if your bias is correct.

    Always apply common sense, for example when etfc was trading at 0.8, its leap 2.5 call was trading at 0.4. You must be batshit crazy to buy that call. No 1 shoe fits all.
  6. He asked specifically about a stock he did NOT expect to move significantly.

    He did not ask about the best strategy when buying calls.

  7. In the past, when I did buy puts and calls on speculation, I bought ATM or slightly ITM and bought them three months out. Suppose AAPL is coming out with some earth-shattering positive news. So, I buy the June ATM or slightly ITM call. Once the underlying and the call pop, then sell the call and take your profit. Many suggest profit targets of 100-200% (a doubling or tripling of the premium paid), but I am not that greedy. Or if you are buying more than one, then sell 1/2 your holdings after the pop, and monitor the rest. I don't buy puts and calls for speculation anymore, for the pop is either too small or it doesn't happen at all. As others have mentioned, an OTM long put or call will benefit more with a HUGE pop but not a small one.
  8. erol


    Thanks again for the advice.