Options Talk - Episode 18 - use case: buy ITM, ATM or OTM calls

Options 10 minutes to read
Koen Hoorelbeke

Investment and Options Strategist

Summary:  In Episode 18 of 'Saxo Options Talk,' Koen Hoorelbeke and Peter Siks explore the strategic nuances of choosing between in-the-money (ITM), at-the-money (ATM), and out-of-the-money (OTM) calls. This episode is essential for traders seeking to optimize their call buying strategies based on market expectations and risk tolerance.


Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks.

Introducing episode 18 - use case: buy ITM, ATM or OTM calls

"Episode 18 - use case: buy ITM, ATM, or OTM calls" offers a detailed examination of a common dilemma faced by options traders: deciding whether to buy ITM, ATM, or OTM calls. Koen and Peter provide insights into the scenarios where each option type might be most beneficial, helping traders make more informed decisions.

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. Their expert guidance helps traders navigate the complexities of options trading, making more informed and strategic investment decisions.

Subscribe and stay ahead

Ensure you don't miss this insightful episode by subscribing to 'Saxo Options Talk' on Podbean, or on Spotify. Keep yourself updated with the latest strategies and discussions in options trading.

Join the discussion

After tuning in, join me on my Threads profile to share your thoughts and insights on the episode. It's an excellent platform for engaging with fellow traders and enhancing our collective understanding of options strategies.

Your questions, our answers

We're eager to hear from you! Send your options-related questions to optionquestions@saxobank.com. Selected questions will be addressed in future episodes, providing customized advice and insights.

Conclusion:

"Episode 18 - use case: buy ITM, ATM, or OTM calls" equips traders with the knowledge to make strategic decisions when buying calls. Koen and Peter’s expert insights and practical tips provide a comprehensive guide to understanding the different risk-reward profiles of ITM, ATM, and OTM calls. Tune in to master your call buying strategies and enhance your trading performance.

Previous episodes of the "Saxo Options Talk" podcast
Previous "Investing with options" articles
Previous "What are your options" articles
Other related articles
Why options strategies belong in every trader's toolbox
Understanding and calculating the expected move of a stock ETF index 
Understanding Delta - a key guide for Investors and Traders
Trading 0DTEs - get your feet wet - without drowning

Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks. In Saxo Bank's Terms of Use you will find more information on this in the Important Information Options, Futures, Margin and Deficit Procedure. You can also consult the Essential Information Document of the option you want to invest in on Saxo Bank's website. 

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992