Buying options ITM - Options on Futures | futures io social day trading
futures io futures trading


Buying options ITM
Updated: Views / Replies:551 / 6
Created: by brags Attachments:0

Welcome to futures io.

(If you already have an account, login at the top of the page)

futures io is the largest futures trading community on the planet, with over 90,000 members. At futures io, our goal has always been and always will be to create a friendly, positive, forward-thinking community where members can openly share and discuss everything the world of trading has to offer. The community is one of the friendliest you will find on any subject, with members going out of their way to help others. Some of the primary differences between futures io and other trading sites revolve around the standards of our community. Those standards include a code of conduct for our members, as well as extremely high standards that govern which partners we do business with, and which products or services we recommend to our members.

At futures io, our focus is on quality education. No hype, gimmicks, or secret sauce. The truth is: trading is hard. To succeed, you need to surround yourself with the right support system, educational content, and trading mentors Ė all of which you can find on futures io, utilizing our social trading environment.

With futures io, you can find honest trading reviews on brokers, trading rooms, indicator packages, trading strategies, and much more. Our trading review process is highly moderated to ensure that only genuine users are allowed, so you donít need to worry about fake reviews.

We are fundamentally different than most other trading sites:
  • We are here to help. Just let us know what you need.
  • We work extremely hard to keep things positive in our community.
  • We do not tolerate rude behavior, trolling, or vendors advertising in posts.
  • We firmly believe in and encourage sharing. The holy grail is within you, we can help you find it.
  • We expect our members to participate and become a part of the community. Help yourself by helping others.

You'll need to register in order to view the content of the threads and start contributing to our community.  It's free and simple.

-- Big Mike, Site Administrator

Reply
 
Thread Tools Search this Thread
 

Buying options ITM

  #1 (permalink)
Trading Apprentice
Vancouver
 
Futures Experience: Beginner
Platform: itrade
Favorite Futures: Stocks
 
Posts: 27 since Sep 2015
Thanks: 14 given, 5 received

Buying options ITM

So it appears that the purpose of the long options game, for the most part is buy an option that is OTM and sell it when it is ITM.

So I get the selling part...but why would anyone be buying an option that is ITM?
  • Why not just by the stock on the market...if you want the stock?
  • Why not purchase an OTM option and reap all of the rewards of it becoming ITM? The only reason I can see is that if you pay $2000 for an option that is deep ITM you may be able to eek out another $200 or so if the stock continues on its trend prior to expiry...and I suppose this is better than paying $200 for an OTM option, that never reaches your B/E price...

Reply With Quote
 
  #2 (permalink)
Quick Summary
Quick Summary Post

Quick Summary is created and edited by users like you... Add FAQ's, Links and other Relevant Information by clicking the edit button in the lower right hand corner of this message.

 
  #3 (permalink)
Flying In A Blue Dream
Jefferson City, Missouri
 
Futures Experience: Intermediate
Platform: NinjaTrader
Broker/Data: NinjaTrader Brokerage
Favorite Futures: CL ES
 
SatchFan's Avatar
 
Posts: 223 since Mar 2010
Thanks: 327 given, 200 received


One reason, and from a futures point of view, you can buy options, both OTM and ITM that would cost less than the amount of Margin that would be required for a futures contract. A reason to buy an ITM option is still you don't have to worry about spikes and getting stopped out and then having the market move on in your favor. Also, if the trend is up and you buy an ITM on a retracement, then your option has higher odds of expiring in the money than one that was bought OTM. Depending on how far OTM it is of course. You could potentially have a retracement the last week of trading on the OTM option that WAS in the money just a few days before expiry, but then the retracement happens and it closes 1 penny below your strike and it expires worthless. BUT, if you bought the ITM, it would possibly have higher odds of still being in the money at expiration because the option has a lower strike price. Just a higher odds play is all.
I don't trade options currently, but back around 1997 - 2004 I traded options on futures and one of my main plays was a Delta Option Trade. I would buy 3 or 4 OTM's that would equal aprox. the margin of the underlying futures contract and if the market made a decent move in the direction I thought it would I would make 2 to 4 times the amount I would have on a 1 futures contract and still had aprox. about the same amount of money laid down. My biggest trade doing that was in Silver and I had bought 4 OTM calls that was a Delta trade and shortly after, Warren Buffet made an announcement of how much physical Silver he had in his own storage and BAM! the Silver market went north hard and I made over $15,000 on those 4 options. Best options trade I ever made. But I had NO CLUE that Mr. Buffet was going to make an announcement. It was a purely technical trade. Picked a bottom I DID!

Here is a link to the story that was posted years ago.... Understanding Buffett's Silver Play | Gold Eagle

Anyway, I hope those answers helped! Sorry about the rambling about an old trade!

Reply With Quote
The following user says Thank You to SatchFan for this post:
 
  #4 (permalink)
Market Wizard
Houston, TX
 
Futures Experience: Advanced
Platform: XTrader
Broker/Data: Advantage Futures
Favorite Futures: Energy
 
Posts: 2,110 since Dec 2013
Thanks: 1,743 given, 3,332 received
Forum Reputation: Legendary


brags View Post
So it appears that the purpose of the long options game, for the most part is buy an option that is OTM and sell it when it is ITM.

So I get the selling part...but why would anyone be buying an option that is ITM?
  • Why not just by the stock on the market...if you want the stock?
  • Why not purchase an OTM option and reap all of the rewards of it becoming ITM? The only reason I can see is that if you pay $2000 for an option that is deep ITM you may be able to eek out another $200 or so if the stock continues on its trend prior to expiry...and I suppose this is better than paying $200 for an OTM option, that never reaches your B/E price...

Buying an ITM Call is the same as buying the Underlying and an OTM put.
With equities I would suspect/believe that buying the ITM requires less margin/cash.
With span margining I'm not sure the same is true with Futures.

Reply With Quote
 
  #5 (permalink)
Market Wizard
Sarasota FL
 
Futures Experience: Intermediate
Platform: NinjaTrader, Sierra Chart
Favorite Futures: ES
 
Posts: 3,633 since Jan 2013
Thanks: 26,745 given, 11,108 received
Forum Reputation: Legendary


brags View Post
So it appears that the purpose of the long options game, for the most part is buy an option that is OTM and sell it when it is ITM.

So I get the selling part...but why would anyone be buying an option that is ITM?
  • Why not just by the stock on the market...if you want the stock?
  • Why not purchase an OTM option and reap all of the rewards of it becoming ITM? The only reason I can see is that if you pay $2000 for an option that is deep ITM you may be able to eek out another $200 or so if the stock continues on its trend prior to expiry...and I suppose this is better than paying $200 for an OTM option, that never reaches your B/E price...

The potential gains from buying a deep out of the money call that goes in the money are large, but most of the time they don't work out, and the option expires worthless.

The potential gains from buying an in the money call are less, but still can be large. Say you buy a 35 call while the stock is selling at 37. Your price will include an intrinsic value of 2.00, the amount it's in the money, and a time value based on whatever the market is currently valuing the probability of the stock moving up in the time left. Arbitrarily, say your total cost is 4.00, reflecting intrinsic value of 2.00 (37.00 - 35.00) and time value of, say, 2.00.

Now assume the stock pops up in a fairly short time from 37 to 41, a gain of 4.00. Your option will gain the 4.00 in additional intrinsic value, plus whatever time value the market gives it. So, assuming no significant change in time value, you could see a price of about 8.00 (intrinsic value now of 41.00 - 35.00 = 6.00, time value assumed still around 2.00.)

To make that 8.00, you put up 4.00. That is an OK return.

Time value will drop off quickly as the option approaches expiration, so you may end up selling it only for the intrinsic value of 6.00 if you hold it until near expiration date, and if the stock price doesn't change again. So suppose the time value declines to a few cents, and the stock is still at 41 when you sell. Your sale price is then only about 6.00 ( = 41.00 - 35.00), which is a profit of 2.00 on your original 4.00. Instead of making 100%, you had to settle for 50%. That's still OK.

If you had bought it when deeply out of the money, your cost probably would have been much lower, so if it worked out the same way, your gain would have been much better. But your probability of success would have been much lower also. Most options bought out of the money stay out of the money, and expire worthless, and so you either sell before then and see a loss, or just wait until expiration and see a total loss. Buying OTM is much riskier than ITM.

Note that most buyers of calls have no interest in buying the stock, and are just looking for the option price to have a good-sized change in their favor. This may not be a great idea, much of the time. This is a worse idea, generally, if the option is out of the money, and only has time value when you buy it. Time value decays fairly quickly.

Also, all buying of options outright, meaning not in a hedging or spreading strategy against some other position, are pretty risky on the whole, and have more losers than winners.

But generally you will notice that volume picks up as they go ITM, as there will be more reason (less risk) to take the chance of buying them then.

Bob.


Last edited by bobwest; October 17th, 2015 at 01:06 PM.
Reply With Quote
The following 3 users say Thank You to bobwest for this post:
 
  #6 (permalink)
Trading Apprentice
Vancouver
 
Futures Experience: Beginner
Platform: itrade
Favorite Futures: Stocks
 
Posts: 27 since Sep 2015
Thanks: 14 given, 5 received


bobwest View Post

Note that most buyers of calls have no interest in buying the stock, and are just looking for the option price to have a good-sized change in their favor. This may not be a great idea, much of the time. This is a worse idea, generally, if the option is out of the money, and only has time value when you buy it. Time value decays fairly quickly.

Bob.


Thanks, it makes sense then if you are looking to flip the contract for profit...or if you buy it OTM and then purchase stock when it becomes ITM...but I still don't see why anybody who wants to buy the stock would need to buy an ITM contract once it is expired or near expiry. I don't see how they are getting any benefit from it once you factor in premiums...at least in my example below.

https://futures.io/options-cfd-trading/37400-example-long-call-option-contract.html


Last edited by brags; October 17th, 2015 at 02:33 PM.
Reply With Quote
 
  #7 (permalink)
Market Wizard
Sarasota FL
 
Futures Experience: Intermediate
Platform: NinjaTrader, Sierra Chart
Favorite Futures: ES
 
Posts: 3,633 since Jan 2013
Thanks: 26,745 given, 11,108 received
Forum Reputation: Legendary


brags View Post
Thanks, it makes sense then if you are looking to flip the contract for profit...but I still don't see why anybody who wants to buy the stock would need to buy an ITM contract...I don't see how they are getting any advantage from it. It makes sense to me to buy a call otm and wait for it to be itm...or buy a call itm and wait for it to be more itm...and it makes sense to sell it to another trader who is hoping for the same...but at the end of the day somebody has to exercise the option..and that person could get the same price just buying or selling on the open market once you factor in premiums...at least in my example below.

https://futures.io/options-cfd-trading/37400-example-long-call-option-contract.html

OK.

I buy a call for xyz, strike price 30. Current stock price is 28. My price is 2.00 intrinsic value plus something in time value. I'll just take an arbitrary number of 1.00 for this example, so I spent a total of 3.00. The time value could be large or small, depending on how much time is left, volatility, cost of money, and whatever else the market is factoring in for it.

I wait. Stock goes to 40. I exercise. I pay 30.00 to get the stock (ignoring commissions.) I have now paid 30.00 to get the stock, plus 3.00 to get the option = 33.00. The stock is now worth 40.00. I could sell it and I would have made 7.00 cash in hand. Or, I could just hold it and my cost to own the 40.00 stock would be 33.00, so I'm still up 7.00.

Or, I could have spent 30.00 in good cash money when the stock was selling at 30.00, and ignored all this option stuff. So if it had gone up to 40.00, I would be up 10.00, which is better than being up 7.00.

But if it had gone down to 25.00 I would have been down 5.00. If I had just bought the call and not the stock, I would be only out the option price, which was 3.00. I wouldn't have the stock, either, which might be OK in this case.

You pay for an option because it gives you an option -- a choice -- that you might or might not want to take in the future. If you don't take it, you lost the purchase price of the option. That's just what the deal is: you pay to have the choice. Maybe you take it, maybe you don't.

Sure, if I ***know*** that the stock price will go up, I should forget this option stuff and just buy the stock as soon as I can. But I don't know. So I pay for the chance to wait and see. It will cost me to get that chance. It might not be worth it, either. Then I lost what I paid. But it might. So I have to figure out whether I want to do it that way, considering that I don't, and can't, know the future. I am paying to reserve a price that may or not turn out to be a good one, and I can't know until some time in the future.

Winning strategy: "Only buy a stock that goes up. If it don't go up, don't buy it." -- I think that is a quote from Will Rogers.

When you're looking at a market, one question to always find the answer to is, "why does this market exist?" If not for the fact that it gives you an option, in advance, that you might or might not want to take, once you see how things develop, there would be no reason for an options market.

It's no different from having an option on a piece of real estate: you put up some money that gives you the right to reserve it at a price you and the seller agree on. You have to pay for that right, and if you don't buy the property, you lose your option money but you aren't stuck with the property. If the prices of real estate in that area fell though the floor, you wouldn't want to buy at that price and would walk away. If they went up through the roof, you would come back and get it at the price you had contracted for. Your option money is gone in either case, and whether you elect to get the property depends on what happens after you have gotten the option, which you do not know in advance.

There is not one bit of difference, other than in details of how things are carried out, between this real estate example and the stock example.

Bob.

PS, I did see your other example in the post you mentioned, but decided to not dig into it. (I may later....)

Of course no one is going to pay that ask price, on settlement date with the bid/ask spread so high. What does the person making the offer care? Maybe someone will pay him, which probably would surprise him, too. The option is going to expire that day. There is no time left at all, and no point in the option, unless someone is doing some last-minute scalping.

Follow a range of prices over a period of time, and not on settlement, and see how they act. You will find that the market prices do make sense if seen in the right light.

Reply With Quote
The following 3 users say Thank You to bobwest for this post:

Reply



futures io > > > > Buying options ITM

Thread Tools Search this Thread
Search this Thread:

Advanced Search



Upcoming Webinars and Events (4:30PM ET unless noted)

Linda Bradford Raschke: Reading The Tape

Elite only

Adam Grimes: TBA

Elite only

NinjaTrader: TBA

January

Ran Aroussi: TBA

Elite only
     

Similar Threads
Thread Thread Starter Forum Replies Last Post
Buying options or just stock? Pariswalk29 Options on Futures 5 August 3rd, 2015 07:09 AM
Buying Deep ITM vs Synthetic Long trade..... mdsvtr Options on Futures 12 November 13th, 2014 04:07 AM
Selling call options before ITM wannabe Options on Futures 5 September 12th, 2014 04:45 PM
buying options iceman70028 Options on Futures 4 January 30th, 2013 01:16 PM
ITM Options or the Future Delta_Panther Options on Futures 0 April 27th, 2011 09:23 AM


All times are GMT -4. The time now is 05:56 PM.

Copyright © 2017 by futures io, s.a., Av Ricardo J. Alfaro, Century Tower, Panama, +507 833-9432, info@futures.io
All information is for educational use only and is not investment advice.
There is a substantial risk of loss in trading commodity futures, stocks, options and foreign exchange products. Past performance is not indicative of future results.
no new posts
Page generated 2017-12-12 in 0.15 seconds with 19 queries on phoenix via your IP 54.167.44.32