Understanding ITM vs OTM Options (How To Pick The Strike Price) - YouTube

hey what's up youtube this is foxtail digital  coming to you again with black girl stocks  

and in this video we're going to be talking  about how you can go about choosing your  

options when you're picking your option trades  you have a lot of different choices to make  

outside of you know picking the stock that you  actually want to trade options with and then also  

the expiration date so do you prefer to trade  in the money out of the money or closest to the  

actual stock price at the money now obviously  your goal as a buyer is to have the option be  

in the money at expiration so the option that you  pick is really going to depend on the amount that  

you want to spend your risk tolerance and your  expectations for how the stock price moves so if  

any of this sounds like greek to you no worries  we're gonna go through this piece by piece okay  

but first if this is your first time watching  this video please make sure that you click that  

thumbs up button it really helps the channel also  subscribe and click that notification bell so that  

you get notified any time i upload a new video  for you guys and with that let's get into it  

first let's do a breakdown of moneyness and when  we talk about options being in the money or out  

of the money these are basically different degrees  of moneyness and moneyness is used to describe the  

intrinsic value of an option contract and how the  strike price compares to the actual trading price  

of the stock so the premium price that you see for  your options is made up of intrinsic and extrinsic  

value and you know we've talked about this before  but the difference between intrinsic and extrinsic  

intrinsic is already profitable so it's the value  that an option has if you were going to exercise  

it today so if you were actually going to buy  those 100 shares then this is your intrinsic value  

this is the value it has right now extrinsic value  doesn't have as much value okay if your extrinsic  

value was to expire today then you wouldn't make  any profit with it so essentially it's worthless  

remember this in the money options have intrinsic  value because their strike price has an advantage  

over the actual stock price and out of the money  options only have extrinsic value the value of  

time and speculation back to the different degrees  there's three oh there's three different degrees  

of moneyness and that's in the money at the money  and out of the money and in the money option has  

a strike price that's already been passed by the  current stock price in the profitable direction  

all right so calls is going to be below the  stock price for puts is going to be above the  

stock price in the money options are going to  move more like an actual stock position because  

the more in the money options have higher delta  values and delta is going to be the measure of  

how much your option price is going to change  based on the movement of the actual stock price  

now this is going into the option greeks i'm  not going to go into it too much we actually  

have a video on it so i'm gonna link that below  make sure you check out the option greeks video  

just think about it like this actual stocks have  a delta of one options are derivatives of stocks  

and they have different delta values so it could  be 0.1 it could be 0.2 0.5 0.7 you know so there's  

different values but the actual stock has one  high delta means that there's a better chance  

for the option to be in the money at expiration so  that's why you'll hear a lot of people talk about  

it percentage-wise now this is something that's  pretty interesting but buying options that are  

really far in the money it's basically going to  have a similar profit profit opportunities dollar  

wise in just buying the actual stock all right  so you see amazon right now is trading at 3 372  

okay now if we were going to look at the options  and we were doing calls looking at our delta value  

the further in the money we go the higher the  delta okay so so this option would basically  

cost you one thousand dollars okay but because  of its high delta however much the stock moves  

you're gonna make that amount times 100 because  this is going to give you control over 100 shares  

and apple's actual stock is trading at 149. 149  times 100 that's 14 000. yeah that's not even  

not even a comparison so basically that just means  even if the actual stock price doesn't move much  

and you hold your contract open through  expiration you can still sell that option  

and still collect the leftover intrinsic value  from the profit that you would make selling it  

whatever the stock price is market price in the  money options are also noticeably more expensive  

than at the money and out of the money contracts  because of their inherent value and with higher  

delta values you're going to gain a lot more  profit when the stock moves in your favor but  

then also at the same time you can lose a lot more  if it moves against you an out of the money option  

is one that has a strike price that the stock  price hasn't reached yet out of the money options  

are a lot cheaper than at the money and in the  money options because they technically hold no  

value so remember like we said earlier if you held  an out of the money option open through expiration  

then it would just expire worthless and you would  lose your full premium out of the money options  

also have a much lower delta value than the other  options so you're going to need larger price jumps  

in the stock price to see good profits with  out of the money option a large stock move  

in your profitable direction can give you big  gains and then at the same time if you know  

if it moves against you a little bit then your  loss is still going to be less than it would be  

if you had an at the money or an in the money  option and then lastly at the money options at  

the money options have a strike price that's equal  or closest to where the stock price is also these  

options are going to have the highest amount of  uncertainty because they literally could go either  

way and they're going to be the most affected  by time decay at the money options can sometimes  

be one of the worst positions for you if the stock  moves against you but then they can also give you  

huge gains with just a little price movement in  the stocks alright so i know the real question  

that you have is which one of these is going to  give you the best return is it going to be in the  

money at the money or out of the money which one  should you choose well the first thing i'm going  

to say is it really all goes into your strategy  i'm going to show you a live trade example of  

having three different options open we're going  to do it on think or swim and how differently the  

strike prices affect your profits okay all right  so this is just a thinker swim uh we're using  

october 14th as the date and i'm going to use a  30 day expiration still november 19th all right  

so and these are going to be our strike prices  right here far in the money is going to be the 135  

so the 135 strike prices are in the money  our at the money is going to be the 140.

and our out of the money is going to be the 150  okay and i'm setting all of these to market so  

i can just go ahead and get in i don't want to  worry about limits and so you'll see that they  

all got filled go into the monitor tab and these  are going to be our list right here so i'm going  

to have it listed out the ones that are in  the money at the money and out of the money

and then right over here this is going to be our  profit panel so this is where you're going to be  

able to see how much money we have made okay so  let's press play and let's let the day you know  

move forward just a little bit and you'll see  already oh wow so looking at the stock chart  

this is just you know a short term how much our  price has gone up from 141 to 142 in the day so  

obviously the one that's making the most is the  in the money but let's go ahead and i want to  

fast forward this to the 18th so just a few days  now i already know hindsight's 2020 already know  

the stock is going up but we're just going to  kind of see what happens with our different  

strike prices so you see here we're on october  the 18th and the stock is still moving up today  

but this is nine o'clock in the morning let's  change it to the afternoon and you'll see again  

the stock has continued going upwards so this  is just a few day span of you know how long we  

waited so this has been a few days from where we  entered so you can consider this a swing trade  

and let's go back and look and see our profits  so you'll see on a longer hold the one that has  

the most money is the in the money at the money  is a little bit less but the one that's received  

the least amount is the out of the money with  more time okay so let's just reset this and i  

want to show you an example with a day trade so  let's still use october 18th let's just go to 8 30  

this morning the stock is obviously it's doing  well and we're just going to use the same  

expiration dates about 30 days away now i'm going  to use the 142 for my in the money strike price

okay i'm going to use the 143 for the at the  money strike price change it to market okay  

and then for the out of the money i'm going to use  the 145 strike price okay so we have all of those  

check on the monitor boom okay one more boom  okay so everything is done and looking at our  

profit and loss short term okay well the out  of the money is moving um you know more than  

either of them so these are our profits here  and you'll see we're profiting more with our  

out of the money now this is just for a day trade

and we've gone from 143 to 144 now the other ones  are kind of catching up but let's just go to the  

end of today today for that day and  we already know the stock just did  

crazy bullish movement strong uptrend now let's  see how our options played out all right so you  

see that all of them did well the one that did the  most was in the money but what's interesting is  

for a short term trade the out of the money is  still pretty profitable and it's a lot cheaper  

it's about 200 what is it 200 cheaper now just  leaving out expiration dates and looking strictly  

at strike prices the first step for you is going  to be to calculate how much money you're willing  

to invest into the trade so what type of options  are you going to want to look for anyway then  

find your target price for the actual stock price  what's the target price that you think the stock  

is going to reach is it close to its all-time  high is a rebounding from that and then also a  

guesstimation of how long you think it's going to  take for that stock to hit your price so all of  

this is going to go into the options that you pick  from the example that we just saw out of the money  

options are going to perform better in situations  where there's a huge move in the stock price in a  

short amount of time for out of the money options  you're gonna want active stocks with regular large  

price movements or big news catalyst now if you're  expecting a small move in price then in the money  

and at the money options are going to be your best  choice also if you're expecting slow growth in  

the stock over a long period of time then it's  also going to be better for you to pick in the  

money options so whether or not you're bullish or  bearish on a stock it's really going to help you  

to have a good idea of when the stock might hit a  certain price one way that you can go about doing  

this is looking at stocks that are trading in a  clear trend or a clear support and resistance area  

so you can plan it so that you only trade stocks  with clear support and resistance zones to kind  

of help you gauge your trades and you know just  as far as expiration uh short term options can  

experience higher losses even when the stock price  is going really high now buying further expiration  

dates gives you more time for the option to move  in your favor and then of course you can exit your  

position earlier once you've gotten your profits  make sure you check out this playlist that we have  

on option trading so you can just kind of go  through and see some of the different videos we  

have on options open interest volume how to search  for options on thinkorswim all of those different  

things so just check out some videos from there  so make sure you check those out all right