Options strike price: How to choose? ITM options or OTM options? // Options trading strategies 101 welcome to looking at the markets with David Moadel just wanted to discuss
today why i buy in the money options and not out of the money options in fact i
would rather sell out of the money options and by in the money options and
i'm going to give you a few examples
ok so let's start with this example this is SP why calls and SP why is the
spiders which is an ETF that tracks the S&P 500 ok and this is from august $YEAR
19 2016
alright and on august $YEAR 19 SP why was trading at 218 and 59 cents
alright so let's look at the price action as you can see SP why was down a
little bit just a tiny bit . 13-percent alright and so if you bought a call
option it would be understandable if your call option lost a little bit of
value it shouldn't lose too much though I mean this is a really small down move
so let's look at 225 calls
ok so that's out of the money
and it is these are expiring September 16 and so this is about a month
expiration date one month out okay
and even though the underlying equity went down just a tiny bit
look look how much the look at how much the out of the money call option went
down I went down 28 and a half percent about that's that's pretty devastating
for one day
all right now let's compare that to an in the money call this is a 210 call
also expiring the same date about one month out and it only went down about
three percent which for an option really isn't that bad
alright and so the in the money call behaves more like the stock does the or
the etf you know the SP why went down a little bit the option went down a little
bit
alright so at what we see here is that you can use
i oftentimes you can use and in the money call option as a replacement for
stock it's like a low-cost stock replacement ok
because the the Delta is higher and so it behaves more like a stock
more like the stock or ETF itself alright and so it we can see that the
huge difference here three percent versus 28 and a half percent alright and
so if you're going to buy anything by in the money and sell out of the money
because if you sell an option you you want it to go down in value quickly
let's look at another example
these are Apple calls all right and as of august $YEAR 19 2016 Apple was
trading at 109 and twenty-seven cents and it went up a little bit
alright not much but it went up a tiny bit and so if you bought a call option
you would expect it to go up not down
but take a look this is a 120 call so it's it's pretty pretty deeply
out-of-the-money here
and it's expiring September 16 so again it's it's about a month out in an
expiration date and look at the the underlying stock here went up a little
bit but the call option went down in fact that went down a little bit over
sixteen percent almost seventeen percent alright that's gotta hurt especially
when you when you're watching the stock go up a little bit
meanwhile the in the money call
and this is pretty deeply in the money here this is a 90 call alright again
expiring about one month out and same-same expiration date and it again
it behaves more like the stock it's it's this would be a good stock replacement
at a deeply in the money call the the underlying stock went up a little bit
and the the call option went up a little bit as opposed to going down almost
seventeen percent ok
and here's another example gld alright that is the gold etf gld as of august
twenty-third 2016 gld was trading at 1 27 89 on this particular day it went up
a tiny bit not much
ok it's almost flat but it went up a little bit and so you would expect you
would want your call option to go up a little bit as well but look at this now
again the these are expiring one month out ok September 23rd call this is a
out-of-the-money it's kinda pretty far out of the money 140 call and look at
that went down
nine and a half percent about
and thatthat's on a day when when the underlying went up a little bit
meanwhile the the in the money call the 124 call here same expiration date one
month out it went up a little bit just like the underlying
did so you know that this is how that this is this is a great or good stock
replacement strategy
it doesn't always work like this by it oftentimes it does because as you can
see the the in the money call option behaved a lot like the stock today are
the etf the etf did the the underlying went up a little bit and they call
option went up a little bit instead of going down almost ten percent like the
out-of-the-money called it alright so I hope this this was helpful and
educational for you and I hope it showed why i buy in the money options not
out-of-the-money in fact I might even sell out of the money options but i
certainly would not buy them in most cases
alright so if you'd like more help with with any of this with finance options
stocks investing trading and so on
I can help you my name is David Modell and you can contact me at David Modell
and that last name is spelled MOA de l @ gmail.com
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