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Options Talk - Episode 18 - use case: buy ITM, ATM or OTM calls

Options 10 minutes to read
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Koen Hoorelbeke

Options Strategist

Summary:  In Episode 18 of 'Saxo Options Talk,' Koen Hoorelbeke and Peter Siks explore the strategic nuances of choosing between in-the-money (ITM), at-the-money (ATM), and out-of-the-money (OTM) calls. This episode is essential for traders seeking to optimize their call buying strategies based on market expectations and risk tolerance.


Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks.

Introducing episode 18 - use case: buy ITM, ATM or OTM calls

"Episode 18 - use case: buy ITM, ATM, or OTM calls" offers a detailed examination of a common dilemma faced by options traders: deciding whether to buy ITM, ATM, or OTM calls. Koen and Peter provide insights into the scenarios where each option type might be most beneficial, helping traders make more informed decisions.

Understanding the scenario

  • Investment setup: Imagine having $4,500 to invest, with the underlying stock (ABC) trading at $100 and an expectation that the stock price will rise.
  • Decision challenge: Determine whether to buy a 90 call (ITM), 100 call (ATM), or 110 call (OTM).

Call prices and quantities

  • 90 call costs $11.50; you can buy 4.
  • 100 call costs $5.00; you can buy 9.
  • 110 call costs $1.50; you can buy 30.

Profit and loss calculations

  • Stock at $90 or below: All calls expire worthless, resulting in a maximum loss of $4,500.
  • Stock at $95: ITM call (90 strike) has intrinsic value; loss is $2,600.
  • Stock at $100: ITM call has a small loss; ATM and OTM calls expire worthless.
  • Stock at $105: ITM call makes $1,400; ATM call breaks even; OTM call worthless.
  • Stock at $110: ITM call makes $3,400; ATM call makes $4,500; OTM call worthless.
  • Stock at $115: ITM call makes $5,400; ATM call makes $9,000; OTM call makes $10,500.
  • Stock at $120: ITM call makes $7,400; ATM call makes $13,500; OTM call makes $25,500.
  • Stock at $125: ITM call makes $9,400; ATM call makes $18,000; OTM call makes $40,500.

Key takeaways

  • Risk vs. reward:
    • ITM calls: Most defensive; provide some return even if the stock moves slightly up or sideways.
    • ATM calls: Balanced approach with moderate risk and reward.
    • OTM calls: Highly aggressive; yield the highest returns only if the stock makes a significant upward move.
  • Decision making:
    • Choose ITM calls: For less risky, more conservative strategies.
    • Choose ATM calls: For balanced risk-reward scenarios.
    • Choose OTM calls: For high-risk, high-reward strategies, expecting substantial stock price increases.

Conclusion

The choice between ITM, ATM, and OTM calls should be based on your expectations of the stock’s movement and your risk tolerance. Constructing tables and scenarios can help visualize potential outcomes and make informed decisions.

Practical advice

Write out the calculations for stocks you are interested in to better understand the potential outcomes and fit them to your investment goals and risk appetite.

In "Episode 18 - use case: buy ITM, ATM, or OTM calls," Koen and Peter provide valuable insights and practical advice for traders to refine their call buying strategies. Their expert guidance helps traders navigate the complexities of options trading, making more informed and strategic investment decisions.

Subscribe and stay ahead

Ensure you don't miss this insightful episode by subscribing to 'Saxo Options Talk' on Podbean, or on Spotify. Keep yourself updated with the latest strategies and discussions in options trading.

Join the discussion

After tuning in, join me on my Threads profile to share your thoughts and insights on the episode. It's an excellent platform for engaging with fellow traders and enhancing our collective understanding of options strategies.

Your questions, our answers

We're eager to hear from you! Send your options-related questions to optionquestions@saxobank.com. Selected questions will be addressed in future episodes, providing customized advice and insights.

Conclusion:

"Episode 18 - use case: buy ITM, ATM, or OTM calls" equips traders with the knowledge to make strategic decisions when buying calls. Koen and Peter’s expert insights and practical tips provide a comprehensive guide to understanding the different risk-reward profiles of ITM, ATM, and OTM calls. Tune in to master your call buying strategies and enhance your trading performance.

Previous episodes of the "Saxo Options Talk" podcast
Previous "Investing with options" articles
Previous "What are your options" articles
Other related articles
Why options strategies belong in every trader's toolbox
Understanding and calculating the expected move of a stock ETF index 
Understanding Delta - a key guide for Investors and Traders
Trading 0DTEs - get your feet wet - without drowning

Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks. In Saxo Bank's Terms of Use you will find more information on this in the Important Information Options, Futures, Margin and Deficit Procedure. You can also consult the Essential Information Document of the option you want to invest in on Saxo Bank's website. 

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