Table of Contents
How does an ITM put work?
A put option is considered in the money (ITM) when the current market price of the underlying security is below the strike price of the put option. 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.
When should I sell ITM calls?
Selling ITM Call: If you are holding the long stock and want to sell the stock. Instead of outright selling, sell an ITM call. You are selling more than at the CMP. One risk is that stock may go lower and you still hold the stock.
What happens if you sell a put in the money?
By selling a cash-covered put, you can collect money (the premium) from the option buyer. The buyer pays this premium for the right to sell you shares of stock, any time before expiration, at the strike price. The premium you receive allows you to lower your overall purchase price if you get assigned the shares.
What are the benefits of buying ITM options?
Buying ITM options also lessens the impact of time decay, as they carry both intrinsic and time value. This means that even the if underlying value of a stock remains static through a contract’s expiration, the trader can sell to close an ITM option and still collect the remaining intrinsic value, thus avoiding a total loss on the trade.
What are the benefits of ITM credit call spreads?
This position gives the best of both worlds with the added benefits of removing the risk associated with naked calls. 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.
Should you sell deep ITM options as an opening trade?
Lastly, “selling” a deep ITM option as an opening trade is not a great practice (increased risk of exercise, lower liquidity, larger bid/ask spreads (more slippage)). Writing deep OTM options also provides a high probability of collecting premium that will not have to be paid back.
What happens to ITM options when the stock price falls?
Even if one used ITM options, as share price fell, the delta of the call would decrease and the amount of hedge per point of drop in the underlying would decrease. IOW, the more the stock dropped, the faster your losses would accrue until they approach 1 to 1.