{"id":30538,"date":"2013-08-22T13:40:16","date_gmt":"2013-08-22T17:40:16","guid":{"rendered":"http:\/\/www.smbtraining.com\/blog\/?p=30538"},"modified":"2023-04-24T11:24:02","modified_gmt":"2023-04-24T15:24:02","slug":"how-to-trade-in-the-money-call-options","status":"publish","type":"post","link":"https:\/\/www.smbtraining.com\/blog\/how-to-trade-in-the-money-call-options","title":{"rendered":"How to Trade In-the-Money Call Options"},"content":{"rendered":"<p>Go long!<\/p>\n<p>No, we don\u2019t mean sending the wide receiver out for a long pass. We\u2019re talking about using the most basic of options trades: initiating a position with a call option instead of buying 100 shares of a stock to create a long position. Options are a great way to take a position in a stock or an index. One option contract represents 100 shares of the underlying asset.<\/p>\n<p>In future articles we will go into the details of options and pricing. For today let\u2019s examine one of the reasons to use long call options instead of buying stock outright.<\/p>\n<p>The term <a href=\"http:\/\/www.smbtraining.com\/blog\/beginners-guide-to-call-options-how-they-work-and-what-happens-after-you-buy\" title=\"Beginner\u2019s Guide to Call Options: How They Work and What Happens after You Buy\">long call option<\/a> means you are buying a call option. The term short a call option means you are a seller of a call option and have collected the option premium instead of paying it.<\/p>\n<p>As of this writing June 13, 2013, IBM is trading at $203\/share. Let\u2019s say based on your technical analysis you felt that IBM was going up in the next two weeks. Buying 100 shares of the stock would cost you $20,300. However, you can buy a call option instead, allowing you to control 100 shares of IBM.<\/p>\n<p>The right option can act almost exactly like IBM does in price movement. We do this by buying a \u201cdeep In-the-money\u201d call option, one that has a delta of close to 1.0. Buying a \u201cdeep In-the-money\u201d call means that you are purchasing a call with a strike price well below the current price of the stock.<\/p>\n<p>The delta represents the price change of the option in relation to a one-dollar move in the stock. So if you buy an option with a delta of 1, it would move dollar for dollar with the stock as it moves up. If you buy one with a delta slightly less than 1.0 (say .99 or .98) and the stock moves up, the delta would increase until it gets extremely close to 1.0.<\/p>\n<p>Understanding an options delta can be a little tricky. If you are a new options trader, give yourself some time to fully understand the relationship.<\/p>\n<p>Back to our example, we can purchase a July 175 call option with a delta of .97 for a price of $28.50. Since it \u201ccontrols\u201d 100 shares of IBM stock we need to multiply that cost by 100 to give us a total cost of $2,850 for the option\u201414% of the cost of the stock.<\/p>\n<p>This allows us to free up $17,500 of capital to use for other purposes. This also means that if we\u2019re right and the stock goes up, our return on capital invested will be much higher that the straight out stock purchase. Of course the opposite is true as well\u2014if we\u2019re wrong, our percentage loss on invested capital would be greater with the option purchase.<\/p>\n<p>But assuming that we exercise the same <a href=\"http:\/\/www.smbtraining.com\/blog\/how-the-value-of-your-call-option-can-decrease-when-the-market-rises\" title=\"How the Value of Your Call Option Can Decrease When the Market Rises\">risk management<\/a> as we would have with stock, then the deep in the money call should create no meaningfully larger loss (nor gain) as if we had purchased 100 shares of the stock. Even if one takes into consideration the 50% margin that brokers will grant typically for stock purchases, the gap in invested capital to make essentially the same trade is still very large in favor of the deep-in-the-money call.<\/p>\n<p>Deep-in-the-money call options are a great way to take a position in a stock, index, or ETF for a fraction of the normal cost, even after margin considerations, and a great alternative to add to your trading arsenal.<\/p>\n<p>Seth Freudberg and Michael Schwartz<\/p>\n<p>no relevant positions<\/p>\n<div><a href=\"http:\/\/www.cboe.com\/resources\/intro.aspx\" target=\"_blank\" rel=\"noopener\">Risk Disclaimer<\/a><\/div>\n","protected":false},"excerpt":{"rendered":"<p>Go long! No, we don\u2019t mean sending the wide receiver out for a long pass. We\u2019re talking about using the most basic of options trades: initiating a position with a call option instead of buying 100 shares of a stock to create a long position. Options are a great way to take a position in a stock or an index. &#8230; <a href=\"https:\/\/www.smbtraining.com\/blog\/how-to-trade-in-the-money-call-options\" class=\"more-link\">Read More<\/a><\/p>\n","protected":false},"author":1037,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[3327,3326,1951,3325,4683,1259,3324,1965,3328],"class_list":["post-30538","post","type-post","status-publish","format-standard","hentry","category-general-comments-2","tag-call-option","tag-how-to-trade-options","tag-option-strategies","tag-option-trading-strategies","tag-options","tag-options-trading","tag-options-trading-101","tag-options-trading-strategies","tag-put-option","no-post-thumbnail"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.1.1 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>How to Trade In-the-Money Call Options | SMB Training<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.smbtraining.com\/blog\/how-to-trade-in-the-money-call-options\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"How to Trade In-the-Money Call Options | SMB Training\" \/>\n<meta property=\"og:description\" content=\"Go long! No, we don\u2019t mean sending the wide receiver out for a long pass. We\u2019re talking about using the most basic of options trades: initiating a position with a call option instead of buying 100 shares of a stock to create a long position. Options are a great way to take a position in a stock or an index. ... 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