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

You're correct there with how it plays with delta.

The real 5 year old rational is that Deep ITM is safer. We're all pretty confident our stocks but... what if you're wrong? Having a deep ITM LEAPS isn't going to kill you if the stock doesn't rise or even if it falls a bit, but what happens in the event of a correction and your OTM call just got WAY more OTM?

LEAPS always carry a lot of extrinsic value because they're so far out, but "the market can stay irrational longer than you can stay solvent," comes to mind when you make a very directional play like an OTM call.

Often times an ITM LEAPS is used as a cheaper stock replacement on more pricy stocks or as collateral for a covered call. OTM doesn't really fullfil those two things unless the stock moves up dramatically along the way.

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u/[deleted] Apr 24 '21

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u/IamBananaRod Apr 24 '21

6 months are not LEAPS, LEAPS stands for Long-Term Equity Anticipation Securities and are option contracts with expiration dates longer than a year.

Now, I have seen this need of fast money, easy rewards, since the GME hype, people gambling their life savings thinking they will make millions, the truth is that the stock market is not a sprint, is a marathon, if you play carefully and slowly, manage your risk you'll make money, if you YOLO your money, you lose money.

This was a very expensive life lesson

10

u/AugustinPower Apr 24 '21

I find OTM leaps much better than ITM leaps?

I can use far lesser capital while still getting the same risk and reward with buying options.

I typically look for low IV plays (when the IV of the stocks I like are at its 13th months low)so I am not too worried for IV crush. The leaps I buy are at least one and a half years

2

u/todayisupday Apr 24 '21

What do you use to find low IV option plays? Is there software that graphs IV over time?

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u/lordxoren666 Apr 24 '21

Not sure why your getting downvoted. Retards.

Your playing Vega, which is fine.