Discussion in 'Options' started by 0008, May 11, 2005.
Should newbie choose ATM options as the trading vehicles?
Your question is too broad.
There's no single answer, sometimes ATM options are the best choice and sometimes they are not. There's a whole range of factors that have an impact on this (e.g. expiry, price target, implied volatility and etc).
Because ATM has no (or not much) intrinic value so if the trade turn out to be wrong I need to cut loss then I only lose part of the time value.
I also think the chance of OTM turn to an ATM or ITM may be rather slim.
Basically, it's not that clear cut, the choice of the option/strategy depends on a lot variables (e.g. time frame of the trade, implied volatility, target price,...), so you can't just say that ATM options are the best.
Assume the S&P is now 1500. I think it may go up so I buy a 1500 call (an ATM). If it goes up, then terrific. If it goes down to 1450 and I want to cut loss then I lost some periemum. But if I buy a 1450 call (an ITM) than I would lose all the intrinic value.
Maybe I should state clearly that I am interested in directional trade in a few days time frame. I know for some strategies you need to buy some OTM.
Now you're talking.
If you're interested in trading a move in the next couple of days then, yes, front-month ATM options give you the biggest "bang for the buck" as they have the highest Gamma.
Gamma is highest for ATM options, so if you don't know how to deal with that I would not trade them without being hedged or understanding the path dependecies of delta neutrality.
If you are just trading directionally and are using options as a substitute for the underlying, then trading ATM options will give you the best momentum properties.
ATM has high gamma, 50 delta, and so on. If that matches your feel for the market's movement, go fo r it.
As others said, it's not quite that simple. The ITM's will have a lot more delta so they will react more in either direction, and of course you are paying for that. The ATM's have more gamma and the lowest IV so you get more bang for your buck.
You need to look at how much delta you are putting on, then you can compare apples with apples. Also, for simple directional plays, vertical spreads are a decent choice as well.
If you are new, and are making directional bets I'd recommend using somewhat ITM options. What happens a lot when you are new, and you make those kind of bets is you end up being right about direction but hardly make any money, because the delta is too small. If you use fairly deep ITM options, the price of the option will move a lot more closely to the way you might intuitively expect, while still having limited downside and decent leverage. Furthermore you will be paying less time premium, so you can let your position ride for longer without having to worry about time decay as much.
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