itm options to replace the underlying

I don't think there would be material on this as it's just an idea. Play around with an analyser and see the risk profile it spits out would be the best way to get a better idea.

 

I have been running some test scenarios in long term outlooks, meaning buying calls 2 years out, comparing the two following alternatives to stock owning:

1. Buy 1 deep ITM call (delta around .90)
2. Sell 1 call ATM (delta .50) and buy 2 calls ITM (delta around .70). I have also played with 1 x 3 at different ITM levels, aiming to neutralize extrinsic value.

Conclusions after some light testing, the Deep ITM route is, on average, about 20% more expensive than the ratio route, so it is a bit more capital intensive.

• On the way up (if trade goes in your direction), gains in either route mimic pretty closely the gains of stock ownership.
• On the way down, losses accellerate faster via the ratio than via the deep ITM, reaching max loss faster.

So, to sum it up: both options work well as an alternative to owning the stock for a fraction of the cost. The deep ITM is a bit more expensive, alas a bit more forgiving to the downside. Both accumulate gains to the upside at pretty much the same speed.

Notes:

• I guess that the ratio would give you more options to manage the trade to the downside, since you would be able to buy back the short call for cheap.
• The ratio gives you better spreads since you dont need to push your long calls so deep ITM where liquidity dries out.
• The ratio incurs in more transaction fees since there are more legs involved.

 

I’ve been trading the poor mans covered call for a while. Deep ITM long call, more than 60 DTE. I target 80 delta long calls, which typically have about 15% intrinsic value (e.g., an $8.50 ITM option will cost $10). I sell ATM calls (50 delta) against the long call, usually 25 DTE. So it’s a net +30 delta trade. The p&l of the strategy pretty much tracks the synthetic when stock price rises steadily, but is flat when the stock price declines steadily. When the stock rises abruptly, the PMCC leaves upside on the table. I keep about 50% of my account in cash.