Trading Options Tip - Commodities

By Author: John Tang
Total Articles: 507
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When the market is highly volatility, Buying deep in-the-money (ITM) options is favored over at-the-money (ATM) and out-of-the-money (OTM) options as when market begins to come back down to more 'normal volatility' levels the ATM and OTM are going to suffer.

Quick facts about Deep in-the-money (ITM) options

Deep ITM options have very modest time value and it is the time value or 'extrinsic' value of an option that is an outcome by increasing or declining implied volatility.

During volatile markets, if your timing is slightly off but right about direction then using deep in-the-money options can be more forgiving. For example if you have a stock with a strong essential uptrend that has experienced a healthy improvement and you enter a little too early by buying Calls before the stock starts trending up again.

ITM options have very small time premium, so they have the potential of ‘buffer' should the stock move against you slightly or move sideways for a period before it starts trending again.

ATM and OTM both are critically determined by time value and therefore your timing in regards ...
... to the direction of the underlying needs to be precise and accurate. During high implied volatility, any phase of oblique movement, or a 'slowing' to how much a stock is rising or falling, can result in sizeable wearing down in the time value premium for both at-the-money (ATM) and out-of-the-money (OTM) option holders. This is because both fall in implied volatility and also time decay.

Counteracting the outcomes of volatility, buying a deep in-the-money (ITM) option can be very successful.

It is questionable by many traders that buying deep-in-the-money (ITM) options are costly; also they are vulnerable to greater slippage due to a wider spread. But the fact remains that 'expensive' is not associated with deep in-the-money (ITM) options. The fact that they require a higher premium is due to their ‘existent' inherent value. In regards to the wider spread, this is in most cases due to market makers not advertising their 'true' buy/sell price.

To sum up penetrating deep enough in the money, where the delta is 1 for calls and -1 puts, these alternatives will move point for point with the underlying stock. Certainly for sure it is beneficial for 'short-term' directional traders.
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