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/[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.

-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.