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OTM options
Hello peers.wish you a happy new year 2010 full of success and good news.I have a basic question for you: why is it that we prefer trading OTM options than ITM ones (a part from the call-put parity justification)?Thank you in advance
OTM options
If you trade an ITM option the value is given by the sum of the intrinsic value and the time value. Depending on your strike the time value may be small (or even negligible) compared with the intrinsic, so if you are buying ITM you may be trading mostly the underlying, which is something you probably don't care if you decided to go to the option market in first place....
OTM options
in OTC options there is another consideration - credit line usage. If the option is marked for line usage on a delta basis the ITM is gonna take up a far lumpier piece of the line. Plus the premiums are gonna be bigger too.
OTM options
OTM options have higher leverage, ie, higher lambda. If you're wrong, you lose a relatively small investment (small delta/vega/theta); but if you're correct, you win on a larger delta and larger vega. You have a lot to win, and not much to lose.
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- closdubois
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OTM options
QuoteOriginally posted by: DeRvIsHHello peers.wish you a happy new year 2010 full of success and good news.I have a basic question for you: why is it that we prefer trading OTM options than ITM ones (a part from the call-put parity justification)?Thank you in advance"we"?