ITM Options. Logic of it?

[yakatan]

Sorry for asking what is a basic question but I can't seem to find the rational behind it on my internet searches.

One of the first things you learn about option is the idea that, when buying an say a call option, if the underlying reaches it's option's strike price you exercise it, therefore the option ceases to exist. My question is, where do ITM calls/puts come from if on reaching the strike price they are meant to be exercised.

The whole idea is you paid a premium to secure a stock at a price you like, so it reaches that price, you buy the stock - no ITM options should exist. What am i missing here?

Also
In the example below where is the logic in paying $62 to put a stock to a seller at $540? If it reaches $540 and I exercise the option i'll be $62 out of pocket. As a put buyer what have i gained? Can someone put me straight please?

stock Price PUT
Jul 12 AAPL (516.39) 540.00 62.05 <- I'm assuming this is premium

Apple Inc. (AAPL) Options Chain - Stock Puts & Calls - NASDAQ.com

 

[Underbase]

As an option (or vol trader) by exercising an option you are burning time value. I would be over the moon if you expired options I wrote you when they went ITM. Also a lot of banks are trading purely for the vol or gamma and keep the delta relatively flat. So if you go take a look at theta you will find your answers.

P.S. there are occasions you might early exercise but they are the exception rather than the rule. If you wanted the stock still just hold the option, if you don't want it then sell the option. Dividends might change things but I am commodities only so others will answer that.

Sent from my Nexus One using Tapatalk

 

[scose-no-doubt]

I dunno what if you wanna lock in your profit on a share portfolio or somethin?

 

[yakatan]

I can understand why selling deep OTM puts can be attractive especially if you don't mind owning the stock. You get paid to wait to buy the stock at a lower maybe even bargain price.

Selling ITM puts, i get paid waiting for the price to do what? It is already past the strike price.

 

[Shakone]

Sorry for asking what is a basic question but I can't seem to find the rational behind it on my internet searches.

One of the first things you learn about option is the idea that, when buying an say a call option, if the underlying reaches it's option's strike price you exercise it, therefore the option ceases to exist. My question is, where do ITM calls/puts come from if on reaching the strike price they are meant to be exercised.

The whole idea is you paid a premium to secure a stock at a price you like, so it reaches that price, you buy the stock - no ITM options should exist. What am i missing here?

Also
In the example below where is the logic in paying $62 to put a stock to a seller at $540? If it reaches $540 and I exercise the option i'll be $62 out of pocket. As a put buyer what have i gained? Can someone put me straight please?

stock Price PUT
Jul 12 AAPL (516.39) 540.00 62.05 <- I'm assuming this is premium

Apple Inc. (AAPL) Options Chain - Stock Puts & Calls - NASDAQ.com

You don't exercise a call when it reaches the strike, because it would be worth nothing. It's worth the difference between the asset price and the strike. You exercise at some point when it is above the strike. Does this clear up your confusion?

 

[toomuch]

ITM options have less extrinsic value to lose (meaning they are cheaper) and have a much greater win/loss % possibility.

 

[toomuch]

Plus, you get higher Deltas, lower Thetas. A much better trade than ATM or even OTM.

 

[toomuch]

Oh yeah. One more thing. You will also be paying less % of the bid/ask spread when entering and exiting the trade, leaving more % return in your pocket. ITM calls/puts are superior for trading vehicles. However, since the initial outlay is greater than ATM or OTM, correct position sizing and loss limits are necessary.

 

[RPEX]

Oh yeah. One more thing. You will also be paying less % of the bid/ask spread when entering and exiting the trade, leaving more % return in your pocket. ITM calls/puts are superior for trading vehicles. However, since the initial outlay is greater than ATM or OTM, correct position sizing and loss limits are necessary.

So why not trade the underlying if you want high deltas low thetas.

Also the lower % bid ask spread is irrelevant, it is only as a result of the premium being higher because of the progressively greater intrinsic value. In point terms they are much wider and you have less likelihood of getting filled as there's less volume and lower open interest. The only time they're useful for a retail punter is as a part of vol plays.

 

[screw_jack]

So why not trade the underlying if you want high deltas low thetas.

Also the lower % bid ask spread is irrelevant, it is only as a result of the premium being higher because of the progressively greater intrinsic value. In point terms they are much wider and you have less likelihood of getting filled as there's less volume and lower open interest. The only time they're useful for a retail punter is as a part of vol plays.

I agree, the % bid/ask spread is irrelevant in this case. And usually it's much cheaper to trade the equivalent synthetics position rather than a deep ITM option.

 

[screw_jack]

In response to the OP, a deep ITM option can be used to free up your capital, but this is probably more useful for non-marginable stocks or in some other special situations.