When it comes to options trading, there’s always the debate between using in-the-money (ITM) versus out-of-the-money (OTM) options.
While OTM options may seem more attractive due to their lower price — and the potential for explosive profits — I’m going to break down why I prefer in-the-money options and how they can give you a serious edge in the markets.
First off, let’s talk about intrinsic value.
An ITM option has real, tangible value. That’s because it already has a portion of the underlying stock’s price embedded in it.
You’re not paying for just hope or speculation — you’re paying for actual worth. Compare that to OTM options, which are purely speculative. They’re cheap, sure, but they’re cheap for a reason — there’s no guarantee they’ll ever move into profitability.
Then there’s the delta — one of the Greeks that measures the sensitivity of an option’s price to movements in the underlying stock. ITM options generally have a delta closer to 1, meaning they move almost in lockstep with the stock.
OTM options? They have a much lower delta, so even if the stock moves in your favor, you might not see the gains you were expecting.
The key advantage of higher delta is that it translates into more reliable price movements, which means you can trade with greater confidence. I’m not interested in gambling on whether a stock might move — I want to stack the odds in my favor.
As a general rule of thumb, I tell my Trading Pit members to target options with a delta around 0.7%.
Another major factor to consider in options trading is implied volatility (IV). OTM options are more sensitive to changes in IV because they’re all about time value and potential.
If IV spikes, OTM options can explode in price.
But if IV drops — especially after an earnings report or big news — those same options can implode, leaving you holding a worthless contract.
By trading ITM options, you mitigate some of that volatility risk. Since these options already have intrinsic value, they’re less dependent on rising IV to generate profits.
In short, you’re avoiding the unnecessary roller coaster ride that comes with OTM options.
I’m not saying OTM options don’t have their place — but if you’re looking for more consistent results, especially in volatile markets, ITM options are the way to go. You’re getting more direct exposure to the stock, minimizing the risk of IV swings, and taking advantage of a higher delta to make more predictable gains.
For traders who are serious about reducing risk and increasing the likelihood of success, focusing on in-the-money options is a key strategy to consider.
I hope that helps!
Roger Scott
Roger Scott Trading
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*This is for informational and educational purposes only. There is an inherent risk in trading, so trade at your own risk.
