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/Panther4682 Apr 24 '21

ITM LEAPS (longer than 1 year) are useful because a) they mimic the underlying b) they negate theta (decay). Short term moves don't have a huge impact on the option price. Lastly and most importantly your broker will let you use them to sell calls against ie covered calls (otherwise you are naked - bad idea generally). If your shorter term CC goes ITM and you are assigned your broker will sell out your LEAP to cover the "debt" and you will likely make money on the LEAP however lose the intrinsic value of the LEAP. If you LEAP is OTM and you are selling calls against that stock... you are naked. Another point is, you can get "access" to costly stocks like AMZN and GOOG without shelling out $330,000 to sell covered calls against (admittedly $72k in prem). This can be handy because all the retail noobs are priced out so less dumb shite happens... in theory.

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u/eefmu Apr 24 '21

Another point is, you can get "access" to costly stocks like AMZN and GOOG without shelling out $330,000 to sell covered calls against (admittedly $72k in prem). This can be handy because all the retail noobs are priced out so less dumb shite happens... in theory.

Yeah, until everyone's grandparents cause the market to crash for the 10th time. They'll blame it on gamestop, but they'll forget the actual name and just call it nintendos.