In-The-Money (ITM) CALL mimics the actual price movement by having a high delta. Delta tracks the premium price movement when the shares of underlying change. A delta of 0.8 means the premium price of the option contract changes by $0.80 when the share price changes by $1. This works both ways when the share price goes up or goes down.
I then realised that with a high delta option contract, the premium is also higher and depending on the delta value, the premium may even come close to the actual price of owning 100 units of the underlying shares.
So, that effectively priced me out from buying ITM LEAPS CALL for companies like Alphabet and Amazon as each LEAPS CALL option contract can cost as much USD200k or more. I eventually bought ITM LEAPS CALL options for cheaper stocks such as Pinterest, Twitter and Disney. I remembered that Disney LEAPS CALL option costs around USD7.5k, which I later had to cut a 45% loss. I am suffering heavy losses for my deep ITM Twitter and Pinterest LEAPS CALL contract because the share price has dropped a lot since the last time I bought the CALL contract.
I then ventured into buying OTM LEAPS CALL contract in 2021 because I realised the return of capital is higher compared to ITM LEAPS CALL options contract. I came out with the LEAPS Growth Formula to help me pick the right strike price, and premium price. I also shared why I bought OTM LEAPS with low delta, but many gurus criticised it and said I do not understand how options work.
Further read here:
I Was Laughed At When I Told Them I Bought LEAPS With A Low Delta
Fast forward to today, I am on the other end of the options contract, i.e. I sold LEAPS CALL off my existing shares instead of being the buyer. With a higher delta for a specific strike price due to the longer date, the premium moves much faster than one with a lower delta. When a particular stock drops fast in share price, I was able to lock in huge profits in a short time.
Read more about the strategy that I use here:
I Discovered A Way To Generate Higher Returns From Selling Covered CALL
So that brings me back to the question that I asked in this post, is the ITM CALL option contract really worth pursuing? Let’s examine the pros and cons of buying ITM CALL options vs OTM CALL options.
- Mimic actual share price movement closely: If you are right, you will get a good return, close to the actual gain of 100 shares but using a lower capital
- Theta (time) decay happens at a slower rate
- More expensive because you are paying for a higher delta
- Lower return of capital (compared using the LEAPS growth formula above)
- Premium drops significantly if the share price goes in the opposite direction
So, in my own opinion, I will not be buying ITM CALL options as the cons outweigh the pros, especially when the market trend goes against you. I will stick to OTM LEAPS CALL when the market is showing signs of recovery or when it is turning bullish.
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Keen to learn about options trading but do not wish to pay for expensive courses, this newbie guide will help gain the knowledge and fundamentals to understand options better. And it’s totally free!
The Newbie’s Guide To Options Trading
The LEAPS Strategy has helped me make more than USD120,000 in 2021. Here’s all you need to know about this strategy that can help you increase your wealth exponentially:
The Ultimate LEAPS Options Thread
Looking for ideas on what stocks to invest in or which stocks to trade? You can take reference from what I have been buying or selling. I try to update them as soon as I can in this section, as well as share my thoughts on executing these trades:
If the bear market in 2022 is making feel depressed as your stocks come tumbling down, read this article to find out how you can use options trading to help you claw back some of your losses as you await market recovery:
How I Do Earn Even When The Stock Market Is Bearish?
Also, check out my trading strategies in different market conditions, whether it is bullish, bearish or volatile:
How Not To Lose Money In Trading? | My Trading Strategies For Bullish, Bearish And Volatile Market
I watched tons of videos on YouTube since 2020 and if you are wondering if there are any useful channels that you can subscribe to for learning market trends, TA, FA, check out this compilation here:
My Secret Weapons For Options Trading: I Watch These YouTube Financial Channels Every Day
I concluded my first year of options trading with more than USD160k of gain, see how I do it and the capital I use for every month to give you a sensing of the percentage yield I get out of my gains:
1st Year Options Trading Recap: The Journey Towards SGD$217,509 Profits In 2021
This blog is as authentic and as transparent as I can share, I do not just show the wins and hide the loss. I have made some very bad decisions in the first 8 years of investing and paid a huge price for them. Here is the loss I have accumulated during these years. I hope you learn some lessons from my mistakes.
I Cut $135,715 Worth Of Losses In The Last 1.5 Months
Want to learn more about Technical Analysis (TA) but find it difficult to grasp the concepts? This article brings you TA at a glance, and helps you understand key terminologies, indicators, and techniques used in TA to equip you with the knowledge that can empower you in your investing/ trading journey.
The Newbie Guide To Technical Analysis (TA)
Excited to start your trading journey or perhaps try out with a paper trading account to build your confidence in trading? Check out this step-by-step to help you get started:
How To Buy Options on Interactive Brokers (Step-By-Step)
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