Why would anyone buy in the money options?
Advantages of In the Money Call Options
Intrinsic Value: One of the most significant advantages of ITM call options is their intrinsic value. They are called “in the money” because the strike price is favourable compared to the current market price of the underlying asset. This means that if exercised, the option immediately results in a profit.
Selling call options in the money allows traders to collect higher premiums upfront, and be more profitable when they are right. However, the stock price going up against your expectations is the primary risk to be aware of. Losses can occur if the price surges so you could consider buying a protective leg to cap them.
Deep in the money options allow the investor to profit the same or nearly the same from a stock's movement as the holders (or short sellers) of the actual stock, despite costing less to purchase than the underlying asset.
ITM options have intrinsic value and are priced higher than OTM options in the same chain, and they can be immediately exercised. OTM are almost always less costly, making them more desirable to traders with smaller amounts of capital.
Advantages of In-the-Money Call Option
ITM calls have a delta (representing the option's sensitivity to changes in the underlying stock price) closer to 1, so they move more in line with the underlying stock price. This provides greater leverage compared to out-of-the-money calls.
When a put option is in the money, you can choose to exercise it. This means that you can sell the shares of the underlying asset as outlined in the contract at the strike price and make a profit.
Key Takeaways
Out-of-the-money (OTM) options are cheaper than other options since they need the stock to move significantly to become profitable. The further out of the money an option is, the cheaper it is because it becomes less likely that underlying will reach the distant strike price.
Call options are a type of option that increases in value when a stock rises. They're the best-known kind of option, and they allow the owner to lock in a price to buy a specific stock by a specific date. Call options are appealing because they can appreciate quickly on a small move up in the stock price.
The ITM call option requires the stock's market price to rise high enough for the trader to cover the total expense (buying price, premium, commissions etc) and then the extra amount made is considered a profit. It is worth noting that ITM options are usually more expensive than other types of options.
What to do with deep ITM calls?
When To Use The Deep In The Money Calls Strategy. You want to sell the stock. By selling a deep in the money call against it you can get a little extra time premium for stock you were going to sell anyway. You've had a big run up in the stock and want to protect recent gains.
Regarding risk, ITM options are generally less risky than OTM options, as they already have intrinsic value, reducing potential losses if the underlying asset's price moves unfavourably.
It's important to note that OTM options have a lower chance of expiring in the money, but also have a lower cost, making them an appealing strategy for traders who want to limit their risk while still having the potential for profit.
Out-of-the-money options perform better with a substantial increase in the price of the underlying stock; however, if you expect a smaller increase, at-the-money or in-the-money options are your best choices. Bullish investors must have a good idea of when the stock will hit their target price—the time horizon.
The Poor Man's Covered Call is an option strategy in which a deep in-the-money call option with a long maturity is first purchased. Subsequently, a Call option sold with a shorter maturity (usually above the current share price).
It involves writing (selling) in-the-money covered calls, and it offers traders two major advantages: much greater downside protection and a much larger potential profit range.
Advantages of In the Money Call Options
Once a call option goes into the money, it is possible to exercise the option to buy a security for less than the current market price. That makes it possible to make money off the option regardless of current options market conditions, which can be crucial.
Options can be a better choice when you want to limit risk to a certain amount. Options can allow you to earn a stock-like return while investing less money, so they can be a way to limit your risk within certain bounds. Options can be a useful strategy when you're an advanced investor.
Selling deep in the money calls is a great way for investors to generate recurring monthly income. Because of their relative safety (i.e. large amount of intrinsic value), deep in the money calls are one of the most popular kinds of covered calls to sell.
Buying options involves the risk of losing the initial premium but offers the potential for unlimited gains. Selling options can generate immediate income but exposes the seller to potentially unlimited losses. If sellers also buy other options to make spreads, it will limit both their upside and their downside.
Are in the money options always exercised?
If an option is ITM by as little as $0.01 at expiration, it will automatically be exercised for the buyer and assigned to a seller. However, there's something called a do not exercise (DNE) request that a long option holder can submit if they want to abandon an option.
A naked call is a type of option strategy where an investor writes (sells) a call option without the security of owning the underlying stock. The investor must take the short side of the call option in order to deliver shares of the underlying security if the option is exercised before the date of expiration.
Advantages Of In-The-Money Call Option
ITM call options have intrinsic value, which is the difference between the current stock price and the option's strike price. This intrinsic value provides immediate profitability. Compared to At-The-Money (ATM) or Out-of-The-Money (OTM) options, ITM call options have lower risk.
When options expire, in-the-money options are typically exercised automatically, leading to the purchase or sale of the underlying asset at the strike price. Meanwhile, out-of-the-money options expire worthless, resulting in the loss of the premium paid by the holder. Nasdaq.
The Bottom Line
At expiration, if an option is out of the money, it will expire worthless. OTM options can be contrasted with in the money (ITM) or at the money (ATM) options.
