Today we’re addressing the differences between buying ITM calls and OTM calls.

Notes

On long calls you want around a 60 delta in the money (higher POP, lower ROI).   To be more aggressive (lower POP, higher ROI) you would go out of the money.  How does that need to work when out of the money?   What happens when you go in the money on trades you use OTM?     I’m not sure how that works

Long Calls = Right to Buy stock

Buying to Open a Call option

Contract that gives you the right to buy 100 shares of stock at the strike price on or before expiration.

$50 stock,

Buy ITM 45 call = right to buy at $45 which is currently a $5 discount to the market price of the stock. Delta 0.60. Premium $6. After $1 rise = $6.60

Buy OTM 55 call = right to buy at $55 which is currently a $5 premium to the market price of the stock.

Delta 0.30. Premium $1.50. After $1 rise = $1.80

Both ITM calls and OTM calls lose value as time passes.

OTM call will lose ALL its value due to time decay if it remains OTM.

Breakeven Formula = Strike + Premium

$45 + $6 = $51. The ITM, 60 delta call only requires the stock rise from $50 to $51 by expiration to breakeven.

$55 + $1.50 = $56.50. The OTM, 30 delta call needs the stock to rise from $50 to $56.50 by expiration to breakeven.

Takeaway: ITM calls are more conservative b/c they don’t require the stock to rise as far to breakeven and profit.

At expiration all OTM options expire worthless. All ITM options are worth their intrinsic value.

When I buy a long call, I remain in the position until the stock hits my target or as long as it remains to bullish to maximize my gains.

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