What happens when a put option goes below the strike price?
If an investor owns shares of a stock and owns a put option, the option is exercised when the stock price falls below the strike price. Instead of exercising an option that’s profitable, an investor can sell the option contract back to the market and pocket the gain.
Why would you sell an ITM call?
An In-the-Money (ITM) option has a strike price less than the current market price. By selling an ITM option, you will collect more premium but also increase your chances of being called away. Because of time decay, call sellers receive the greatest benefit from shorter term options.
What happens when you sell an ITM put?
An in the money put option is one where its strike price is greater than the market price of the underlying asset. That means the put holder has the right to sell the underlying at a price that is greater than where it currently trades.
Why would you sell a put option ITM?
The put option is in the money because the put option holder has the right to sell the underlying security above its current market price. An investor holding an ITM put option at expiry means the stock price is below the strike price and it’s possible the option is worth exercising.
Should you buy deep ITM options?
For example, buying deep ITM calls can be a proxy for buying the stock itself on the cheap. Delta is close to one, so you are not paying a whole lot of time premium. Typically, expirations for these call options ought to be 3 – 6 months.
Should you trade a deep ITM credit call spread?
By trading a deep ITM Credit Call Spread, a trader is able to capture a large premium in the option along with reducing all downside risk associated with short stocks and option trading. Even though the spread does not outperform a naked call directly, it does once you add the risk associated with this trade back into the risk-to-reward profile.
What is a deep ITM/OTM short option position?
Understanding why someone might want a short options position that is deep ITM/OTM is a little more complicated. This is often part of a more complex spread position which includes legs closer to ATM. The intent of this sort of position is usually to isolate and trade volatility, gamma, or other higher-order moments.
What is deep in the money in options trading?
An option is said to be “deep in the money” if it is in the money by more than $10. This phrase applies to both calls and puts.