I see a lot of people posting about buying OTM calls especially LEAPS That “cheap” OTM call may be the most expensive option on the chain. A low-priced out-of-the-money call can feel like a bargain. “Why buy the $6 ITM call when I can buy the $0.60 OTM call and control the same 100 shares?” Because the $0.60 call contains zero intrinsic value. You are paying 100% for extrinsic value: time, implied volatility, and the possibility that the stock makes a large move before expiration. Example A stock is trading at $100. $110 call costs $0.60 Break-even at expiration: $110.60 Intrinsic value today: $0 That means the stock has to rise more than 10% just for the contract to break even at expiration. Now compare that with a $90 call costing $11 $10 is intrinsic value Only $1 is extrinsic value The option is more expensive upfront, but much less of the purchase is pure uncertainty do not confuse cheap premium with cheap exposure. The lower-dollar contract often requires the biggest move, has the least room for error, and can lose 100% of its value very quickly. Before buying any call ask yourself “How much of what I am paying is intrinsic value and how much is just hope?” Make sure you understand Intrinsic value and Extrinsic value of an Option
Great reminder! Although Leaps OTM are also the ones where you can potentially make many times in return with a known maximum downside. Personally I treat them as overall return booster in my portfolio and size them as high risk opportunity where I'm OK to loose all the premium paid.
zyn @ohio911 · 1d
Same day expiry... strike price around traded price are what ?
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