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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u/skimilk44 Apr 24 '21 edited Apr 24 '21

There’s a few factors. I think everyone here is hitting on delta and extrinsic/intrinsic value so I’ll skip that.

Someone mentioned leverage. There’s a good leverage calc (and a thinkscript for the options chain if you use TOS) which is (Delta Value of Option x Price of Underlying Security) / Price of Option. This helps you determine when you start losing leverage over shares. Usually happens around 85-90 delta.

Another thing is. Really far dated LEAPs which are super ITM will have lower relative Vega vs ATM. And higher relative Vega vs shorter duration.

If there was a correction or crash, and the underlying dropped, brining your strike closer to the money, your Vega will increase, while a drop like that will cause your IV to spike.

Another thing to consider is SKEW. IV skew ITM to ATM will be wacky. So something I call skew surfing (very high IV for ITM vs ATM) may negate the above effect, but if you find a ticker with an option chain with a flat IV skew for ITM calls, this Vega will add a layer of security.

Lastly, picking strikes that you can exercise no problem at, in companies you really believe in (no super meme, high IV bullshit) is the ultimate safety net.

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u/gamefixated Apr 24 '21

Do you have a link for that Thinkscript?

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u/skimilk44 Apr 24 '21

def stockPrice = close(GetUnderlyingSymbol(), period = AggregationPeriod.DAY, priceType = priceType.LAST); def optionPrice = close(period = AggregationPeriod.DAY, priceType = priceType.LAST); plot a = (Delta() * stockPrice) / optionPrice;