whats the difference in buying an ATm option w/ a delta of .50 or buying 2 options w/ a delta of .25? I hear people all the time that they only but ATM or DITM options my perception is sometimes its cheaper to buy multiple "cheap" contracts rather than 1 expensive contract. the only problem i see is liquidity of the lesser contract.... but im trading so few contacts im not sure its a concern. any comments ideas?
The total delta is instantaneously the same, but you should also look at gamma, which is the rate of change of delta. An ATM option will have higher gamma as it moves ITM, which means your delta increases and makes you money faster. Another not-completely-unrelated factor is that as time decay eats away at the premium, an ATM-turned-ITM option will hold its intrinsic value, which is yours to keep. The cheaper OTM options will waste away to nothing if the move isn't big enough and fast enough.
Threre isn't difference in delta but you'll be more exposed to others options sensitivities. Your leverage (if you're tranding volatility or time decay) will be bigger trading with OTM options. But be careful, the biggest gamma will come you to most frequent adjustment and then, the price you'll pay will be bigger too. Sugar
Don't forget about the implied volatility smile (skew) structure. For equities, farther OTM options generally have a higher IV. This difference become more pronounced the closer to expiration you get. In other words, the smile becomes a maniacal grin.
OK! That's a very important point here. Moreover if this structure changes against us. We must be care about it.