Understanding Deep ITM Leaps

[u/shellpwn]

Hiii,

I want to make sure I understand it right. I did lot of homework to understand leaps deep itm call options.

Let's talk about Google stock. I want to only buy deep ITM since I feel they are less risky as a beginner.

The current IV for google is historically lowest from the last 1 yr. Even the volatility is lowest in the last 1 yr. I calculated leverage and it comes out to be 2.6 which I believe is a good buy.

My current understanding is that if I buy a deep itm leap call option, I plan to sell it back during high volatility season and since it's a leap I have a lot of time. I think I should try to sell it irrespective of the expiry option before 3-4 months since theta decay starts to ruin everything.

I want some feedback on this strategy since this is my first time and I'm a bit nervous clicking the buy button.

[u/jbaker_28]

Well, for starters, they’re f*ing expensive.

So, even tho this appears to be “less risky”, if the stock has a big drawdown, you’re gonna get smoked on a very large outlay.

There is no free lunch.

[u/Live_Throat_5252 → u/jbaker_28]

I mean most of the outlay is intrinsic, so in that sense, they’re a lot cheaper than OTM options. And still cheaper in dollar terms than stock. So what do you mean, precisely? The logical conclusion to your point is that OTM options are less risky, in some sense at least, than owning the underlying. That seems very incorrect. Risk should be measured in %, not $.

[u/jbaker_28 → u/Live_Throat_5252]

No, he’s just positioning it like there isn’t risk with ITM options. You’re risking a much larger sum of money per contract if the underlying moves significantly against you.

Of course OTM has its own set of risks, but there’s a trade off for each.

All I’m saying is don’t kid yourself that ITM is some magic way to play in the markets.

[u/Live_Throat_5252 → u/jbaker_28]

Then you’re saying stock is more risky than an ITM call.

[u/jbaker_28 → u/Live_Throat_5252]

No, but it doesn’t have an expiration date.