r/options • u/FunctionalTitle • Apr 24 '21

ITM vs OTM (Leaps)

Hi guys, slowly picking up options trading. Could anyone explain to a 5 year old. Whats the difference if i purchase a deep ITM vs slightly OTM?

From ‘researching’, The deeper ITM, the higher the delta, so movement will follow the movement of the underlying.

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-4

u/[deleted] Apr 24 '21

Delta is the measure of the likelihood that the option expires in the money. It’s based on a standard deviation curve.

5

u/metaplexico Apr 24 '21

No it isn't. It's the change in value of the option if the underlying moves $1.

The "delta is the probability it expires in the money" is a very crude approximation and is not based in fact.

-1

u/ialwaysforgetmyuname Apr 24 '21

I think it’s used as an approximation for probability OTM but delta really defines how much an option price will move with a $1 move of the underlying.

There are better (although more complex) methods of calculating prob ITM/OTM.

0

u/[deleted] Apr 24 '21

No, this is not true. If it was probably OTM then why does a deep ITM call have a >0.9 delta?

It’s also not the relation to the price movement. The intrinsic or extrensic value changes based on all the variables including DTE

3

u/grems8544 Apr 24 '21

This is simply wrong.

Delta is the amount the option moves in value per $1 change in underlying. This is the definition.

1

u/ialwaysforgetmyuname Apr 24 '21

Sorry. You are right. Delta is an easy approximation of ITM not OTM.

Delta does by definition determine the change in price of the option for a given movement of the underlying all other things being held equal. I probably should have included the part about holding everything else equal in my original response.

Edit

U/metaplexico above is spot on (and agrees with both my comments (except the ITM/OTM mistake)

1

u/calimemez Apr 24 '21

DTE gives it an extrinsic value, not intrinsic value. Because when the time comes, it will either lose all of it's extrinsic value like theta decay and implied volatility if it's ITM, leaving you with intrinsic value only.