Covered Calls and Naked Puts are almost identical in terms of risk and reward. The risk of both is relatively substantial compared to the reward - I would not recommend them.
Some awesome feedback here. Just to touch a few points: Intrinsic/Extrinsic: If we are going with options that have a delta value of 1 there should be no cost for buying the option (granted usually it hovers around .96 -.98 but sometimes you can get options at 1.0). Expiring Worthless: The option can expire worthless but that means (with Delta 1 options) you lost the same amount that you would have lost if you were holding the underlying instrument. Technically you could then just buy the stock at this lower price and still control the same amount of stocks as you would have were you to go with buying the stocks directly. I.e.: Stock @ 100 -> 50 (50$ Loss) Option @ 50, Delta 1, Strike @ 50: Stock goes to 50, option expires worthless (50$ loss) Same loss in both situations. However, the 50$ saved from buying the option can be used to buy the stock at 50$, therefore you would control the same amount at the end of the period. Additional strategies: Yes, there are lots of other strategies: Some risky, some less so. But without going into these *very* interesting discussions, I just want to loop back to the main point: Why not always invest in deep in the money delta 1 options instead of buying the underlying stock? So far I've seen ways to improve upon this, but none that really say : Here's a major downside.
The downside is slippage commission and dividend (if any). Your broker will be happy for your approach.
You're leaving yourself no protection. With ATM, OTM or just ITM notice how much smaller the delta is. So while the underlying, of your very DITM, is falling $1 for $1, your ATM is losing at most .50 on the $1. And if your underlying ascends, very quickly your delta ascends. Options are dynamic, and if used correctly can make a nice profit and or sustain small losses. Sit back, relax, don't go so deep and enjoy the action. It's all about defense. Cheers!
The intrinsic value in the DITM options is his protection. The spread is his cost to play it that way. I cannot see a situation in which ATM or OTM options is more protected for what he was originally talking about.
Your intrinsic value is protected from nothing. You have exposed yourself to, too much delta. Think about it. If you bough 1 DITM call for $9, and 1 ATM call for $1, and the underlying tanks by $9. The $9 DITM call drops like a brick off the empire. The ATM call still drops, but more like a frisbee because it's loaded with extrinsic value. That's in my world playing defense. If you're right on the direction, yes immediately you get dollar for dollar on the very DITM where the ATM delta will take a little longer to catch up. It's worth the wait, you'll sleep better at night. Cheers!
Indeed ITM options provide leverage and protection against massive moves. Obviously, you pay a wide spread for that, and options have a certain interest rate priced in them so you don't get to be long the stock with less cash for free. This is no secret. Get an option pricing book