What Is a Deep in the Money Call?

Deep in the money option. Deep In The Money Options

Good babies were thrown out with their bathwater.

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After all, subprime defaults will not cause every company to suffer indefinitely. People will still drink coffee, write checks and charge their way through life much as before. But prudence is important.

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As attractive as a company may look, you shouldn't dive headfirst into a shaky market. There may be rocks in the water. So how can you dip your toe to catch a few bargains?

Deep in-the-Money Options Definition The term deep in-the-money refers to an option that has significant intrinsic value.

If you're want to buy a beaten-down bank, beverage purveyor or building-products company, there's another way. Take a minute look at deep-in-the-money call options.

Deep In The Money Options

Call options are exchange-tradable securities that give you the right to buy a certain number of shares per option contract at a certain price strike price by a certain date expiration date. You pay a price known as a premium for the option. Deep in the money option why "deep-in-the-money?

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If the market -- or the company -- falls apart, your risk is limited. It's called leverage.

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Of course, as with most propositions there's a tradeoff. You can lose. If the stock dips near term but advances long term -- say, after expiration -- you may be left holding the bag. Had you bought shares, which don't expire, you would have recovered.

The 15-minute tip: Deep-in-the-money call options

Limiting downside risks Still, I like this approach in a jittery market -- so long as you know what you're doing -- because your downside is limited, and if the market jumps back like it did last springyou're good. Here are some examples: Starbucks. I think the strong brand SBUX, Like those that follow, I think the upside exceeds the downside.

Discover Financial Services.

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I think this premium credit-card provider is a "baby with the bathwater" story, as they appeal to loyal, more-upscale customers. Fifth Third Bancorp.

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But it's still a solid institution and a good acquisition candidate. One caveat: by buying the option instead of the shares, you lose any dividend.

Deep In The Money

But if all works your way, you'll exercise the options and buy the shares -- cheap -- later on. These are just examples, and I know that options aren't for everyone.

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You have to watch more closely. But before buying shares -- especially in today's volatile climate -- it's worth taking a minute peek at your options.

Social Media 8 Reasons to Buy Deep in the Money Calls F or many people, the term options trading is synonymous with risk and potential catastrophic downsides.

Peter Sander contributed to this article. You can reach her at jopenshaw themillionairezone.

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