Hi,
so I'm not sure I understand the very basics of options, or at the very least, I'm confused by the existence of far OTM options.
Let's just use an example with simple numbers (The numbers are OBVIOUSLY not correct, they're just in the ballpark). The stock of ABC Corp is trading at $100 a share, with "decent" volatility.
An ATM Call with Strike Price ~100$ is trading at 10$, to breakeven I'd need the underlying to trade at 110$.
A deep ITM Call with Strike Price ~50$ is trading at 55$, to breakeven I'd need the underlying to trade at 115$.
A deep OTM Call with Strike Price ~200$ is trading at $1, to breakeven I'd need the underlying to trade at 201$.
Between the ATM and ITM, the difference looks to be clear: I need less of an upswing to make a profit with the ATM, but have a higher chance of losing what I paid for the option.
However, I don't understand the OTM call at all. Let's say I bet on the underlying suddenly increasing a ton, which is why I want to buy the OTM. Now, most likely, this is not going to happen, and I lose the $100(100*1$) I paid. But my confusion arises from the scenario where the price does break above the $200. Let's assume the price of the underlying is suddenly 205$:
My deep OTM would only yield (205-201)*100=400$, even though I took this enormous risk! And even weirder, my ATM call would yield (205-110)*100=9500$!
So not only would I take way less risk by buying an ATM/ITM, I would ALSO profit MORE? Clearly, this can't be right. What am I getting wrong here? Isn't it usually that the upsides of investments with greater risk tend to be greater, even if they happen with less probability? Yes, I paid less premium, but what interests me isn't the exact premium I paid, but rather the difference between currentQuote and (strikePrice+cost), since that's my profit.
Submitted November 08, 2021 at 07:27AM by IUNOOH https://ift.tt/3HbHnDc
