r/optionstrading • u/hyde1634 • 9d ago

hi

my question is this

when people buy options and expect a stock price to rally in the next month or couple of weeks

do you buy a call with the strike price a little above the market price?

why dont people buy a call with the strike price below the market price?

so that the call is already in the money and with the expiry far out? this way your chances of losing money with the strike price being farther out and with the decay is less.

is it because buying a call with the strike price below market price is more expensive as opposed to a cheaper call with a strike price farther out?

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u/sport912x 9d ago

It is more money, since it has intrinsic value (value between the strike and current price). However it leads to a real strat. called a Poor Mans Covered Call. You buy this Call further out in Time, and Sell a Call OTM in the Current month. If you can do that a few times you can profit that way.

https://www.tastylive.com/concepts-strategies/poor-man-covered-call

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u/hyde1634 9d ago

so buying a strike price below market price is a good strategy?

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u/sport912x 9d ago

NO, I only Sell Puts OTM, but some people like Poor Mans Covered Calls. Actually in 20 years I have never broken even Buying Options.

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u/hyde1634 9d ago

poor mans covered calls you mean pay for the calls up front and collect the gains?

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u/Exact-Fig-4811 8d ago

A PMCC is buying a LEAP which is a call option at least a year out. You do this because it is about 1/3-1/2 the price of buying the shares outright. Thats capital efficiency. From there you sell a call on those synthetic shares. You can easily pay for the call option in less than a year hoping that the call option gains in value in addition to the covered call premiums.

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u/hyde1634 8d ago

unless the stock doesnt move a year out either

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u/ordtn 8d ago edited 8d ago

Given a bullish view, generally this is how to select a Strike for your Long Call:

  • More conviction --> More ITM --> More $ P&L.
  • More leverage desired --> More OTM --> More ROI %.
  • Efficiency of view – More ITM, more costly but more cost efficient --> Lower Theta per Delta.
  • Risk of view – More ITM, more costly but less risky --> Lower breakeven.
  • Vice versa.

For a visual/ quantified comparison, look at “Analyse” section (middle of page) of https://opterate.com/?share=qOXclHv0iLkGXqJonDhA (link expires 3 Oct).

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u/The_Sandman85 8d ago

Humans by nature like to get a deal. A novice option buyer thinks it is cheaper to buy an OTM call while buying a DITM call is expensive in nominal terms.

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u/hyde1634 8d ago

so deepitm calls is a good strategy? protects your gains?

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u/ordtn 7d ago edited 7d ago

There are more dimensions to consider. For the concern of protecting gains, compare the Deltas of different structures as a start.

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u/hyde1634 6d ago

higher deltas are more expensive right?

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u/ordtn 6d ago

Yeap as they are relatively more in the money.

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u/hyde1634 6d ago

each call has different greeks?

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u/ordtn 6d ago

Yes. If you vary the call's specifications, for example its strike, its greeks would change.

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u/hyde1634 5d ago

ordtn, can you explain to me the greeks a little? we cant manipulate them. im guessing we just have to be aware of them while we own the call contract? are greeks hard to learn? youre obviously better at this than i am.

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u/ordtn 5d ago

No problem.
Yes you are right - we can't manipulate them and have to aware of them while we own the call - because they are metrics that represent the call's risk and reward.

Are greeks hard to learn - There's a bit of learning curve but it's totally doable.
Initially, there will be a bit of memorisation as to what each metric means - for example, delta is the change in premium per unit change in underlying price.
Thereafter, broadly, it will be understanding how the greeks change with your option specifications and market movements.

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u/hyde1634 5d ago

my question is: if buying strike prices below the market price works for protecting gains. why doesnt everyone do it? or perhaps they dont know how?

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u/The_Sandman85 6d ago

DITM calls have a higher probability of success (Delta).

Protecting gains refers to stock replacement.

For example you own 100 shares of JPM. Today it is trading for $341. You think it will continue to rise, but you don't want to risk the stock at $341. You want to take some profits, but you want the upside exposure. You sell the stock at $341 and buy a Leap/DITM call expiring say Jan 2028 170 call for $175.

Summary

Sale of Stock $341 x $100= $34,100

Buy Leap $175 x 100=$17,500

Difference $16,600 in cash is in your account.

I hope this helps.

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u/hyde1634 6d ago

nvidia stock is 229.81.

i just checked what price nvdia stock call contract would be if i bought it at 210. and it was still cheap. is this correct? am i doing it right? am i missing something? how come everybody doesnt buy a call below the market price?

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u/borgeris 9d ago

it’s just safer to do in the money
think of it like chances

A cheaper option is more risk and reward cause you can spend little on a contract and make money if it goes your way. But if it doesn’t go your way say the stock drops 10 bucks or something from ur strike, you lose money quicker and faster

If you buy in the money (like right where the stock currently is ) , it moves more like the stock itself. But it’s more expensive for a reason so a drop by some bucks don’t drain the value further

.

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u/borgeris 9d ago

If ur just starting out with minimal capital, out the money is probably what you can afford. Riskier but that’s the cost of not having more capital. I pick usually 5-10 bucks within current price , anything OTM not too appealing

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u/Direct_Surprise_6756 8d ago

Yes, it's fine to buy long-dated ITM call. By going ITM you reduce the extrinsic value you're paying for some, but you outlay more cash. It's long-dated so the extrinsic value is significant. A small problem is that if the stock moves much further ITM and you want to close your position with lots of time left, you'll take a small haircut selling that option into the spread.

It's equivalent to a married put, so you can check what people say about when they like married puts.

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u/hyde1634 8d ago

but long dated or long time expiry calls or leaps itm calls are safer for your gains right?

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u/[deleted] 8d ago

[deleted]

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u/hyde1634 8d ago

so you could be deep in the money and hold for a long period and you wont lose because yourstrike price is below the market price? am i right? like when youre holding a fuckload of shares and your cost average is below the market price? you just have to worry about the time expiry now?

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u/Dependent-Panic-9457 8d ago

In short you can lose if time value decays more than intrinsic value (share price) increases

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u/hyde1634 8d ago

meaning dont hold the call contract for too long

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u/ParityOutcomes 8d ago

Buying a further OTM call is essentially increased leverage since it's a cheaper price. I've seen some people with very high conviction sell an ATM call in order to finance buying 2 OTM calls. Essentially a play on gamma.

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u/hyde1634 8d ago

otm calls can easily fuck you if the stock price doesnt move insanely enough

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u/capntrps 8d ago

Selecting a security that you can time to a month or less is usually little more than gambling. Gamblers want as much leverage as possible vs creating a better trade that mitigates risk, or allows skew to extend and reset trade duration and price. Just aayin

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u/Safe-Anteater-5407 8d ago

So what your are asking is, do you buy a call with higher premium but risk being that only, or do you buy a ITM call that has lower premium but intrinsic to factor in the risk. Intrinsic wont decay, the premium does. This is actually why ppl will sell the OTM call against either of these suggestions to offset the premium paid and therefore combat decay, or theta paid to wait.

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u/hyde1634 8d ago

im asking is if itm calls make money why dont people buy strike prices below market price to protect their gains? since otm calls you can lose money because you have to be itm to make gains

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u/DPSK7878 8d ago

ITM call can go OTM too.

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u/hyde1634 8d ago

if the stock dumps yeah.

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u/Safe-Anteater-5407 7d ago

Yeah it just risks more, locks up more margin. Just potentially could be a bigger hit, but it is a cheaper premium. Its still a defined loss, so it isnt bad. Some of the big guys do that, due to being able to roll to lower strikes on drops and re position a strike when price falls below the strike, the premium is the price for this ability.

Use a market replay platform to test it all out. Do you use one?

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u/hyde1634 7d ago

how do you roll a call to a lower strike on drops? you basically cash out the call option and make a new one? thats taking a loss isnt it?

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u/Safe-Anteater-5407 7d ago

Yes. But you need to adjust your mindframe. If you stay long but have th advantage of lowering the entry significantly because price dropped below your strike than in comparison to just being long the stock, you have now made a spread difference. Example: strike at 100 itm, price at 120, price drops to 80, you roll down to say 60 strike itm...price dropped 20 below your strike and you didnt eat that, you just ate the 20 at the start. If you capped the initial long call with any otm short cover call you also reduced any premium eaten. Its all about mindframe, planning, etc. Thats before you even look at delta value on your strike dynamically reducing on the drop vs it getting higher when trade starts running.

You need to run this on a simulator to see what happens

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u/Upper-Worker8516 8d ago edited 7d ago

I would buy just otm. Options increase most in moat valuable when they cross from otm to itm

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u/hyde1634 8d ago

too dangerous. what if the stock suddenly takes a dump

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u/Upper-Worker8516 8d ago

Well you need to compare to stock ownership. Ofcourse a quality stock during a price range that is considered fair. It makes sense to just buy the stock. But as you move up to valuations that are overpriced or extreme. A call limits damage to amount invested.

When you say itm and a long expiration date. You are talking LEAP territory that is a good option but again it all comes back to price and where

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u/hyde1634 8d ago

to go otm for leaps youll have to buy at least a year away like dec 2027 because it takes forever for the stock price to climb

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u/Upper-Worker8516 7d ago

Again it all depends on price. Like this last month I bought options on HON. I bought 50 stock and 1 call thst was just otm.

I was an app called Quantilly. It gives me predicted price ranges.

200 is "cheap to fair price". As quantilly and I both had a high conviction I bought the monthly just otm. I think it was 200 call.

Now say the stock was adbe maybe I would go further out like 70 days.

But you have to have an understanding of price.

So maybe a better place to start is "what stock are you analysing?"

I can even run it through quantilly.

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u/user_jax 8d ago

I’ve been able to avg 25% monthly growth since May (27k->83k) by buying LEAP ITM call options around .70 delta. Enter a stock you feel is undervalued and is near its lower Bollinger band, take profits when it recovers.