In-Call Option or Out-Call Option: Which is Better?

Before making any decision, consult your financial advisor. This article aims to provide you with valuable insights to help you understand the differences between in-the-money (ITM) and out-of-the-money (OTM) call options and when to buy them. Whether you are a seasoned trader or a beginner, knowing the right time to buy options is crucial for maximizing your potential gains.

Understanding Call Options

Call options allow the buyer to purchase an underlying asset (such as a stock, index, or commodity) at a predetermined price (the strike price) within a specific time frame. The two types of call options are in-the-money (ITM) and out-of-the-money (OTM). Choosing the right option is crucial to your trading strategy.

Buying In-The-Money (ITM) Call Options

If the underlying asset's price is higher than the strike price of the call option, it is considered an in-the-money (ITM) call option. ITM call options are generally more expensive because they have intrinsic value. However, they offer immediate potential for profit, making them a good choice when you expect a significant increase in the underlying asset's price.

Advantages of ITM Call Options:

Immediate intrinsic value Potential for higher returns Lower risk of expiration without value

Buying Out-Of-The-Money (OTM) Call Options

OTM call options have a strike price that is higher than the current market price of the underlying asset. OTM options do not have intrinsic value; however, they have the potential to gain intrinsic value if the asset price increases.

Advantages of OTM Call Options:

Lower premium costs Potential for explosive gains if the underlying asset's price rises significantly Flexibility to manage risk through stop-loss orders

Factors Influencing the Choice

The choice between ITM and OTM call options depends on the underlying asset's trend and your trading strategy. Trends can extend over days, weeks, and even months. If the trend is going well and you are following the trend, buying ITM call options can be more rewarding. Conversely, if the trend is not in your favor, OTM call options can be a better choice.

Example with BankNifty Index

Let us assume the BankNifty index, which expires every week and has high volatility compared to Nifty. Your question is about buying a call option at ITM or OTM. These depend on the trend of the previous week. Trends generally do not change daily and can last from a week to months. If you are in sync with the trend, buying an ITM call option is typically a good choice. Buying OTM call options, on the other hand, can yield more than 10 times the return if you enter at the right time. However, if the trend is not as anticipated, your OTM option will lose its value.

Professional Advice and Further Resources

For more information and learning resources, visit my YouTube channel - Systematic Day Trader and follow my blog, Delhi Day Trader. These resources will provide you with comprehensive insights and guidance on trading options, including strategies and risk management techniques.

Final Note:

Consulting a financial advisor before taking any decision is crucial to minimize risks and optimize your trading strategy.