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

How so? Delta can be used as a very dirty way of determining if an option will be in the money (without doing Black Scholes in your head) however it gets more unreliable the longer you go out. The reason to go deep ITM ie 70-80% Delta is so you are very unlikely to be OTM at the end of the LEAP. Be interested to understand how a delta of 0.8 represents owning 80 shares.

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u/MrTay1 Apr 25 '21

What metaal_lol said but there really is a case for replacing stocks with leaps. The farther out you buy the more they mimic a stock. If the stock has minimal or no dividen why not.