Long DITM call with 1 delta as cheaper way to long stock?

Discussion in 'Options' started by turkeyneck, Apr 19, 2010.

  1. Shhhhh

    Shhhhh

    Yes, especially usuing LEAPS. It is a cheap way to participate dollar for dollar with any move in the underlying, for much less cost. For example...

    Amazon.com (AMZN).

    Say you wanted to buy this stock buy didn't have $14,000 to buy 100 shares available at the moment.

    You could buy a January 2012 $50 Call for $94.70 which has a delta of 0.992 Thats about as close to 1 as you can get. And you're spending about a third less. (of course bid/ask spreads can be large in options so its advisable to place a bid between the current bid/ask for a better fill.)

    Now if $9500 is still a bit too steep a price to pay...

    You could buy a January 2012 $80 Call for $69.10, this option has a delta of 0.9352, which is still significantly close to 1 and you still enjoy Essentially the same benefits as owning the stock outright.
     
  2. Sure it can be good if the stock goes up in that timeframe.

    On the other hand if you buy a DITM call and the stock were to fall to just below the strike price by expiration, you could lose 100% of the investment, while shareholders would still have the stock and could have suffered less % of a loss.

    Not saying it can't be a good idea, but it's not something that's big news or anything - just another way one can use options if they want to.

    I think the other issue would be that option traders often use options for leverage, and this reduces it in a large move in the correct direction. For example, instead of buying 100 shares, sure you could buy 1 or maybe 2 DITM calls, but you could also buy maybe 5-6 ATM calls or 10+ OTM calls - obviously riskier, but sometimes speculation money is used for options.

    I guess my point is that while you still theoretically risk 100% of the upfront investment with DITM calls (check with someone who did this with LEH or GM for example), you don't get as much of gains as you could possibly get with other strategies.

    P.S. - Personally I think it's amusing how the sub title of that book makes it look like some super

    secret or something!

    JJacksET4
     
  3. Why would someone publish the secret money printing strategy for the low price of 19.95?

    Honestly, any book with the word "Rich" as part of the statement, is pure Bullshit.
     
  4. You've got to keep an eye on the bid/ask spread as well. The more DITM you get, the wider the spread will probably be, especially as you get further out in time. For example, if you buy SPY and turn around and sell it immediately, you're probably out $2-3. Try that with a DITM, and you might be down $20-$30. Also, you aren't getting a totally free lunch here, as even a LEAP DITM will have some time decay associated with it, so you are effectively paying a fee so you can put up less cash.

    I also wouldn't recommend buying a DITM option because you can't afford 100 shares. To me, that's making the mistake of over-leveraging yourself.

    I like ITM options with deltas of 60-80. If you are correct on the direction and you are using a fairly near-term month, your delta will soon be at 1. If you're wrong, gamma will help reduce your delta as it goes the other way, so it gives you a way to help slow down your losses.
     
  5. I've read this book. Its funny how this technique or strategy as the author likes to think of it is powdered throughout the book.

    things this book does not do:

    I have yet to find a book that tells people to roll into and out of their trades, using multiple strikes in order to get a decent fill / price improvement and to avoid being kicked around by the price action in advance of a move you've anticipate. I have maybe 20-30 pdf option books, and hard copies of a dozen others, and not a single one stresses the importance of placing your option trades in a kind of bricolage format in order to position yourself appropriately while the Market moves for or against you.
     
  6. piezoe

    piezoe

    Very interesting post. Can you be a little more specific? Perhaps with an example.
     
  7. Illum

    Illum

    Isn't this what "Nails" was doing?
     
  8. Nails got nailed until his amnesia gave him a clean slate
     
  9. Nails!! That's my ashtray money bro!!
     
    #10     Apr 20, 2010