Dykstra: Deep-in-the-Money Calls 101

If you don't have the time to watch your stocks all day, you can always put a good-till-canceled (GTC) limit order in to capture the profit. Remember, a win is a win, especially in options. Don't be greedy, and keep in mind that with options, you always have time working against you.

To help you get started, here's the CliffsNotes version of DITM calls.

• The strike price, or exercise price, of an option determines whether that contract is in the money, at the money or out of the money. If the strike price of a call option is less than the current market price of the underlying security, the call is in the money; the holder of this call has the right to buy the stock at a price that is lower than the price he would have to pay to buy the stock in the open market.
• I love in-the-money calls because of the leverage they provide. It allows you to have exposure to a stock with significantly less money at risk versus a cash or (certainly) margin purchase for that same stock. Your risk is limited to the cost of the in-the-money call, compared with buying the stock with cash or on margin, which is a very dangerous game that I strongly suggest you avoid playing.
• My deep-in-the-money calls are normally at least four to six months away from the strike price. If the stock moves in the direction I expect it to, my in-the-money call will be in prime position for a win. If the stock moves against me, with the DITM call, I have more time to recover. (I will explain more about averaging down, an important part of my strategy to manage a pick that goes down, in a future column)

To sum it up, my strategy for in-the-money calls is to use them when a solid company is being beaten down on Wall Street for one "transgression" or another. My theory is that this overreaction will eventually correct itself as the value of the company reasserts itself over time; those who buy deep in-the-money-calls in advance of this correction will be rewarded.

All it takes is one or two bounces, or spikes, in the stock to make that profit.

Remember: Life is a journey, enjoy the ride!

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