Deep In The Money

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Deep In The Money Calls by Mike Scanlin We've discussed in the money covered calls before, but given the market's recent run up, we thought it timely to revisit the subject for those of you who feel we're a bit overbought and are looking for some safety. If you do any buy-writes next week with Feb expirations you may want to consider deep in the money options. Deep In the money calls are those where the strike price of the call option is significantly less than the current stock price. What is "significantly less"? The IRS definition of deep in the money is any option with less than 90 days until expiration where the strike is less than the first available in the money strike, or any option with more than 90 days until expiration where the strike is less than 2 strikes in the money.

Good babies were thrown out with their bathwater. After all, subprime defaults will not cause every company to suffer indefinitely.

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People will still drink coffee, write checks and charge their way through life much as before. But prudence is important. 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?

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

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. 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.

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And why "deep-in-the-money? 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 option exercise deep in the money. Had you bought shares, which don't expire, you would have recovered. 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 earn one bitcoin per day jumps back like it did last springyou're good.

  • Deep In The Money Calls
  • A deep in the money option has an exercise, or strike price, significantly below for a call option or above for a put option the market price of the underlying asset.
  • Deep-in-the-money financial definition of deep-in-the-money
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  • Deep in-the-Money Options Definition The term deep in-the-money refers to an option that has significant intrinsic value.
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Here are some examples: Starbucks. Like those that follow, I think the upside exceeds the downside. Discover Financial Services. 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. But if all works your way, you'll exercise the options and buy the shares -- cheap -- later on.

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These are just examples, and I know that options aren't for everyone. 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.

Peter Sander contributed to this article.

Deep In The Money

You can reach her at jopenshaw themillionairezone. Fireman and his wife, Phyllis, will be worth more than at any point in the 26 years he's been at the helm of the athletic-shoe icon. More On MarketWatch.