Is it true that no matter what price you buy an option at, that as the price per share of the stock moves clos

Question

er in direction (up for a call), (down for a put), to your strike price at purchase, the more valuable your position becomes? And as the price per share moves away in direction, (down for a call), (up for a put) the less valuable, possibly even a loss ...your position becomes?

In other words, being in the money really only counts when you want to exercise the option to buy or sell the stock from the writer of that option? So that an options buyer does not have to ever be in the money to make money.

Am I correct here? Cause I notice a lot of people buying near the money and maybe there is some advantage, but not quite sure what that is.

Answer 1

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It is true the option will be more valuable than if the price per share had not moved, but it does not always mean the price of the option will go up. There are other factors, such as the amount of time before expiration and the implied volatility of the option, that can have more of an impact on the price of the option.

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It is true the option will be less valuable than if the price per share had not moved, but it does not always mean the price of the option will go down. There are other factors, such as the implied volatility of the option, that can have more of an impact on the price of the option.

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From one perspective, that is true. From another perspective, there are other differences that may be important to some. For example, an in the money option has intrinsic value and will never become worthless as long as it remains in the money.

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You are correct.

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Near the money options have the highest gamma and the highest vega. Both of those can be highly desirable for an option buyer.

If I believe implied volatility for an option is too low I would prefer to buy a near the money option

(1) to make more from the increase in implied volatility (vega) I expect, and

(2) to increase the rate at which the option increases in value when the price of the underlying makes a favorable move (gamma).

Answer 2

For an option whose strike price is near the current value of the underlying security, the fractional change in the value of the option is larger per dollar move in the underlying security. So you get more leverage in your position for options that are marginally in the money.

You do not have to ever be in the money to make money, but you won't make as much as you would have if your option was marginally in the money.