If Intrinsic Value = Option Price Why Buy OTM?

Discussion in 'Options' started by zghorner, Sep 12, 2019 at 12:23 PM.

  1. zghorner

    zghorner

    Why would anyone buy OTM options when they could buy ITM options where the intrinsic value is basically equal to the price of the option? It seems to me like betting solely on extrinsic value via OTM is a bad idea...giving something for nothing in hopes it turns into something. Where does time value factor in to your trading strategy?

    And i know i am a noob-ass on an "elite" trading site asking rudimentary questions but please help a brother out. I do appreciate the help.
     
  2. Where did you get this ridiculous notion?

    Option sellers are trying to capture the time premium. How to they earn a profit if they sell at intrinsic value?
     
  3. zghorner

    zghorner

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  4. zghorner

    zghorner

    look at the circled ITM calls vs the $20.5 strike calls in the same date that cost $0.17 and are $0.78 OTM.
     
  5. zdreg

    zdreg

    Get a books on options.
     
    krugman25 likes this.
  6. tm689

    tm689

    You buy out of the money options if your view is different from the consensus. They are also cheaper.You will get a bigger percentage return if your outlook proves correct.
    Unless you are employing an advanced option strategy you are probably better off just buying the stock (rather than buying an ITM option) since you are subject to time premium decay in your ITM option as time passes. With the stock might also be able to collect a dividend.
     
    zghorner likes this.
  7. Yeah I think this is too basic a question to not put some time in yourself reading some basic books. it would take too long to explain and not sure you have the fundamentals to understand the answer.

    Read up on intrinsic and time value and option pricing and you will get a better foundation.

    Bottom line an option you buy can go up in price based on delta and/or volatility even if it is OTM when you bought and still OTM currently and you make money.
     
  8. krugman25

    krugman25

    Agreed with everyone here, the question is too vague. Why would someone buy OTM options, why would someone sell OTM options, why would someone buy spreads, why would someone sell spreads, etc, etc, etc? There are answers to all of those questions. Grab a good book or look up the plethora of options trading websites that would answer all of those question.
     
  9. Hint: If I sell you an empty wallet for $5, or one with $20 in it for $25, is the wallet now worth more?

    I agree with everyone else who's told you to buy a book and learn about option basics - they're not being snarky, that really is the level of help you need right now - but this part of your question answers itself: if you buy any sort of a rapidly-depreciating asset, you're already "giving something for nothing in hopes it turns into something".

    Options aside, if you can figure out why someone would want to do that, you'll be half-way there.
     
  10. gaussian

    gaussian

    Huge gains if you're right, basically. You spend pennies on contracts for an infinitesimally small chance of gain.

    There's also a concept not taught in many books called "units" which are DEEP OTM options you use to hedge against black swans.
     
    kv1289 likes this.