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Strategies & Market Trends : The Options Box -- Ignore unavailable to you. Want to Upgrade?

To: Poet who wrote (66)	5/9/2000 5:09:00 PM
From: Eylon	Read Replies (3) \| Respond to of 10876

I have seen statements about the assumed superiority of ITM calls because of higher delta many times. While it is true that the delta of OTM call is lower it is only half the story. The reason to buy OTM call is leverage. Leverage is the multiple of the call gain compare to the stock gain. If the stock will go up fast your gain from OTM, high leverage, call will be higher even if the delta is low. Here's a theoretical example from cree using the current price and volatility: cree price now 125 June exp price, delta, leverage 90 , 0.9 , 2.8 180 , 0.17 , 6.5 As you can see if you have one contract for 90 and one contract for 180 calls and cree tomorrow will be up 5% or about $6 the gain from the 90 will be $54 and from the 180 only $10. On the other hand if you have the same amount of money in the the two calls and cree will go up 5% tomorrow you should have 14% increase in the 90 but 32% increase in the 180. The reason to buy ITM is lower risk. The reason to buy OTM is higher potential gain. OTM = faster time decay, higher risk, higher potential gain ITM = slower time decay, lower risk, lower potential gain The delta is just a number that give us some clue about the option behavior when the stock price changes. It is not the reason to avoid OTM options or the reason to buy ITM options.