Social Media 8 Reasons to Buy Deep in the Money Calls F or many people, the term options trading is synonymous with risk and potential catastrophic downsides.
However, there are a few options strategies out there that can help limit the possible risks, present decent money-making opportunities, and cost less than just buying stock outright.
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- Article Reviewed on July 31, Michael J Boyle Updated July 31, An option contract's value fluctuates based on the price of the asset underlying it, such as a stock, exchange-traded fund, or futures contract.
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Takeaways: Deep in the money calls are low-risk, low-reward options contracts. Deep in the money calls are great for income generation and buy-write strategies. What Is a Deep in the Money Call?
Image via Unsplash by Adeolu Eletu Before you can understand what a deep in the money call is, you need a working knowledge of a few other options contract concepts.
Call Options Call options give you the right, though not the obligation, to buy shares — usually shares per options contract — by a specific day for a particular price. On the options contract, the specific day is known as the expiration date, and the price is known as the strike price.
A call option is in the money ITM when the underlying security's current market price is higher than the call option's strike price.
The amount of money you pay to purchase the call option is called the premium. Or if it: Has a term of more than 90 days and the strike price is two strikes lower than the highest available stock price.
Additionally, as the money gets deeper, the delta gets higher, meaning that the option should move in step with the underlying asset in terms of valuation up or down. This buy option in the money from other options strategies in which the valuations do not move together.
Deep in the money calls work in much the same way as buying traditional stock.
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A deep in the money call is a great strategy for specific investors and investing goals. Leg option deploying a deep in the money call strategy if you: Are selling the underlying stock: By selling the deep in the money call against your stock, you have the possibility of earning an extra time premium on stock you intend to sell regardless.
Want to protect your gains: If you own the stock outright and are concerned about a downswing in value, you can use a deep in the money call as protection, though there is the possibility for some loss here. Want a stock replacement strategy: You can purchase a deep in the money call option rather than outright shares in the stock at a discount.
He has provided education to individual traders and investors for over 20 years. Article Reviewed on February 01, Gordon Scott Updated March 12, Traders buy a call option in the commodities or futures markets if they expect the underlying futures price to move higher. Buying a call option entitles the buyer of the option the right to purchase the underlying futures contract at the strike price any time before the contract expires.
Unlike some other options strategies in which you can potentially lose an unlimited amount of money, the deep in the money call protects your downside. Positive ratio: The ratio of downside losses to upside profits is weighted in your favor. You stand to earn far more than buy option in the money would lose should the stock move in an unfavorable direction.
Stock-like behavior: These high-delta calls result in options contracts that act like regular stocks. This makes them substantially less volatile and easier to manage.
Income: You can make a small income using this strategy. While the rewards are generally low, so are the risks.
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- Not only can you close the position at any time or simply wait until expiration, when it gets closed for youbut you can bank similar returns for a fraction of the cash outlay.
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If you plan out your deep in the money calls effectively, you could calculate how much money you stand to earn ahead of buying the options and build in a profit. Deep in the Money Example Deep in the money calls make the most sense when you see how they work in actual practice. Consider this example deep in the money call for a better understanding of how this strategy works.
Using a deep in the money call can be a powerful strategy for risk-averse investors who are still interested in getting in on the power of options trading.