Why buy options in the money when you can buy out of the money options a lot cheaper? Is it because it takes more of a change in the price of the stock to affect the option price of otm options?
ITM options have a higher delta and are better for trading. OTM options are for speculation, or for selling to speculators.
It's a trade off whose results depend on the size of the move. If you compare a samme dollar investment, the ITM has a better chance of making money due to higher delta. If the underlying goes nowhere or drops a bit, there may be some salvage value. The OTM is more likely to lose more $$ if no move or drop but on a big move, will have a greater ROI and make more. That's called leverage
Basically the price of the option is close to the probability (less uncertain facts and the oh shit factor) that it will be ATM or better on expiration. Ex. If it costs $1.00 or more for an option, the market believes it will be ATM on expiration. If you are looking at a $0.05 option, then you have a 95% chance of loosing the entire investment. - Some may not agree with these comments but that is a general way to look at it and hopefully change the way you think about this game. You should be selling those OTM's.
What a load of nonsense. Now I see where you got your name. It should be obvious to you that the raw price per contract is no indication of anything, since a $1 option would be a 50 cent option if the stock split 2:1, yet it would have exactly the same chance of finishing ITM/OTM. Also, unsurprisingly, a $4 option does not have a 400% chance of finishing in the money. The statistical probability that an option will expire in the money is better known as "delta".
The OTM is more likely to lose more $$ if no move or drop but on a big move, will have a greater ROI and make more. That's called leverage I like the leverage part. I bought some cheap options a couple of times purely for speculation, but thats the extent of my options experience. I'm starting to look into other strategies now.
1)Intrinsic value and higher delta. You get what you pay for, generally speaking. 2)Yes, personally I won't purchase an OTM option.