Hi everyone, I would like to seek your insights on this question please.
I would like to trade call / put options instead of shares. My day trading strategy is such that I will always just buy call or buy put option. And its to replicate day trading of shares, i.e. I will buy and sell the option within 10minutes to 2 hours (I will buy around 930 – 10am, and I will close position, whether profit or loss, by 12pm US market time).
And so, the call / put option that I buy should be as sensitive to change in the share’s price as possible.
For the above objective, should you select:
1) shorter or longer expiry?
2) ITM or OTM?
3) any other factors?
4) Any change to your response if i were looking to allow overnight positions, ie. max 2 days holding?
AI said OTM offers higher leverage which got me thinking.
Eg. SPY is at $534.67. If I buy a SPY 1 DTE $534C for $1.35 (ITM) vs buying a $535C (OTM) for $0.80,
Buying $534C ITM moves more closely with the price. Based on current price of $533C for reference, if SPY moves up $1 this $534C will fetch maybe $0.60 profit on $1.35 spent.
But buying $535C OTM gives you higher % return for each $. Again based on current price of $534C as an example, if SPY moves up $535C will fetch maybe $0.50 profit on $0.80 spent.
Is there anything I am missing?
ITM or OTM options have more sensitivity to price changes?
byu/ShortPutAndPMCC inoptions
Posted by ShortPutAndPMCC
4 Comments
The sensitivity of the price is the delta.
Under normal conditions, an ITM option has a higher delta, meaning it mimics the stock more closely. An option with a delta of 0.60 moves 60 cents for every $1 move on the stock.
Longer term duration options also in theory have less sensitivity to price flictuations because they have a smaller theta decay. You can pull up an option chain on a stock that moved up today and you should see the call options reacting accordingly.
Spend some time in the options chain to get a definitive answer. First point, just trade the big boys. There’s a bull market somewhere, and now it’s called NVDA. There’s action at every strike and every expiry, but why would you go anywhere but this week and deep OTM is where it’s at. A world wide market that’s like shooting fish in a barrel. It will end in due course but that could be years out. So buy a 10 cent call and double your money with a 10 cent rise. Even a cave man can do it!
This might be helpful for you: this is my last 6 weeks of trades. All SPY options were 0TDE. You can compare and contrast the ITM trades (all trades with premium >$1.00) to the OTM trades (all trades with premium <$1.00). I’m still figuring it out myself, but I’ve been sticking to either the first 1-3 ITM options, or the first 1-2 OTM options.
[https://imgur.com/a/PjGFQ5e](https://imgur.com/a/PjGFQ5e)
I cannot quite follow you 53xC logic but I assume you take current price differences between different options as your presumed profit if price changes?
In any case, you are most likely interested in [leverage / lambda](https://money.stackexchange.com/a/154642/109107). The link has computer code demonstrating the calculation and how it works.
The [classic definition](https://www.hkex.com.hk/-/media/HKEX-Market/Products/Listed-Derivatives/Single-Stock/Stock-Options/Stock-Options-Search/Option-Glossary/so_glossary.pdf) of leverage for options, frequently called ‘lambda’ ( sometimes effective gearing or also leverage factor), is defined as Delta times Stock price/Option price (Δ*s/p_call).
Soc Gen offers a [quick explanation](https://hk.warrants.com/en/education/warrantcbbc-faq/id/104/title/What%20is%20the%20difference%20between%20effective%20gearing%20and%20gearing@q) of gearing and effective gearing for options (a vanilla warrant is really just an option, ignoring details like dilution etc.).