Buying Deep ITM Options
Len Yates

Buying deep in-the-money (ITM) options is a good way of carrying out directional trading in high volatility market environments. When implied volatility (IV) levels fall, it is the purchasers of at-the-money (ATM’s) and out-of-the-money (OTM’s) options that are hurt the worst, while the deep ITM options are relatively unaffected. This is because deep ITM options have very little time value.
One reason I like buying deep ITM calls is that as the market trends upward, it naturally experiences one or two days of setbacks. These setbacks affect my deep ITM calls very little on a percentage basis, so I am more comfortable seeing my position through. And because the deep ITM option has very little time premium, I am not nervous about time decay.
On the risk/reward scale, holding deep ITM options falls in between the higher leverage / higher risk buying of ATM or OTM options, and the more sedate buying of vertical debit spreads. I have commented on vertical debit spreads previously as being a good way of neutralizing the effects of falling volatilities. However, buying a deep ITM option can be just as good in this regard, and is more straightforward process with fewer transactions.
Note that buying LEAPs can accomplish a similar thing, but buying deep ITM (usually nearby) listed options is probably a little higher on the risk/reward scale because of the fact that deep ITM options move point-for-point with their underlying. LEAPs also possess a much greater vega risk (exposure to a fall in volatility).
Some investors might object that deep ITM options have a wider bid / asked spread, causing the trader to experience worse slippage. But I have not found this to be a problem in the issues I trade, especially because I can direct my trades to the best market. If you cannot direct your trades, placing an order in between bid / ask is often successful.
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