Episode 18 - Use Case: Buy ITM, ATM or OTM Calls

Episode 18 - Use Case: Buy ITM, ATM, or OTM Calls

Description: In "Episode 18 - Use Case: Buy ITM, ATM, or OTM Calls," Koen Hoorelbeke and Peter Siks dive into the strategic decision-making process behind choosing in-the-money (ITM), at-the-money (ATM), or out-of-the-money (OTM) calls. This episode is crucial for traders looking to optimize their call buying strategies based on their market outlook and risk tolerance.

Understanding the Scenario:

• Investment Setup: Imagine having $4,500 to invest, with the underlying stock (ABC) trading at $100 and an expectation that the stock price will rise.
• Decision Challenge: Determine whether to buy a 90 call (ITM), 100 call (ATM), or 110 call (OTM).

Call Prices and Quantities:

• 90 call costs $11.50; you can buy 4.
• 100 call costs $5.00; you can buy 9.
• 110 call costs $1.50; you can buy 30.

Profit and Loss Calculations:

• Stock at $90 or below: All calls expire worthless, resulting in a maximum loss of $4,500.
• Stock at $95: ITM call (90 strike) has intrinsic value; loss is $2,600.
• Stock at $100: ITM call has a small loss; ATM and OTM calls expire worthless.
• Stock at $105: ITM call makes $1,400; ATM call breaks even; OTM call worthless.
• Stock at $110: ITM call makes $3,400; ATM call makes $4,500; OTM call worthless.
• Stock at $115: ITM call makes $5,400; ATM call makes $9,000; OTM call makes $10,500.
• Stock at $120: ITM call makes $7,400; ATM call makes $13,500; OTM call makes $25,500.
• Stock at $125: ITM call makes $9,400; ATM call makes $18,000; OTM call makes $40,500.

Key Takeaways:

• Risk vs. Reward:
  • ITM calls: Most defensive; provide some return even if the stock moves slightly up or sideways.
  • ATM calls: Balanced approach with moderate risk and reward.
  • OTM calls: Highly aggressive; yield the highest returns only if the stock makes a significant upward move.
• Decision Making:
  • Choose ITM calls: For less risky, more conservative strategies.
  • Choose ATM calls: For balanced risk-reward scenarios.
  • Choose OTM calls: For high-risk, high-reward strategies, expecting substantial stock price increases.

Conclusion: The choice between ITM, ATM, and OTM calls should be based on your expectations of the stock’s movement and your risk tolerance. Constructing tables and scenarios can help visualize potential outcomes and make informed decisions.

Practical Advice: Write out the calculations for stocks you are interested in to better understand the potential outcomes and fit them to your investment goals and risk appetite.

In "Episode 18 - Use Case: Buy ITM, ATM, or OTM Calls," Koen and Peter provide valuable insights and practical advice for traders to refine their call buying strategies. Tune in to enhance your options trading skills and make more informed investment decisions.