Why should you buy DITM options?

Who would turn down the opportunity to buy shares at half price? Especially when the profit potential is exactly the same and the loss potential is cut in half. This is exactly the benefit of trading DITM (Deep-in-the-Money) options. By buying an option as a substitute for a stock, but at about half the price, you can take advantage of the full scope of a market move. Because your initial investment is less, your risk decreases. However, because you get the same return as if you bought the shares, the return on your investment is doubled.

Many traders stay away from options trading, because it is often perceived as gambling. A trader will buy a cheap OTM (Out-of-the-Money) option, hoping that a market movement will turn the option into an incredibly profitable trade. It is true that options trading is often driven by greed rather than solid strategy, and that due to the leverage involved in options trading, it is much riskier. However, if options trading is based on a well-planned strategy, it doesn’t have to be risky or a gamble.

DITM options trading is a completely different ball game – it cannot be classified at the same level of risk as other types of options trading. In fact, it has a lower risk profile than ordinary stock trading. The reason for this is the powerful weapon of DELTA, which is one of the so-called “Greeks”. Delta is a term that describes the degree to which the price of an option will increase relative to the price of the underlying stock. For example, let’s say the Delta of a call option on Stock XYZ is 50%. If XYZ increases in value by $ 1.00, the option price will increase by approximately $ 0.50. That is, 50% of the market movement is captured. DITM options typically have a Delta of 90% or more, which means that more than 90% of a market move can be captured. The catch is that the cost of the option is usually about half the price of the share.

This means that if a trader wants to buy 100 units of XYZ shares at $ 20 each, his total investment is $ 2,000. If the stock goes up to $ 22, it can be sold for a profit of $ 200, which is a 10% ROI. However, in this example, our trader could buy a call option (representing 100 units of shares). The cost would be approximately $ 1,000, if the Delta approaches 100%. If the stock were to go up to $ 22, you’d capture the exact same $ 200 move. Because your initial investment is half that of a stock trade, your ROI is now 20%, exactly double that.

There are only three downsides to DITM options trading. The first is that dividends are only paid on the shares that are actually owned, not on the option to purchase the shares. The second is that options always have an expiration date, so if the market movement has not been captured at expiration, the option must be sold or it will expire worthless. The third is that broker fees for options are slightly higher than for stock purchases.

Trading DITM options is a very effective strategy that is equivalent to swing trading, day trading or momentum trading. Not suitable for long-term traders, but it is an extremely useful form of short-term stock trading with half the risk and twice the potential return.