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Mastering Derivatives: Why ITM options are less preferred

  • In the options market, the price of an option consists of intrinsic value and time value, with only in-the-money (ITM) options having intrinsic value.
  • While intrinsic value is calculable and reflects the difference between the underlying price and the strike price, ITM options are less preferred due to various factors.
  • ITM options can result in high losses if the underlying asset declines, as the delta of an ITM call option is large, leading to significant price declines due to both delta and time decay.
  • Additionally, ITM options require more trading capital, have lower liquidity compared to out-of-the-money options, and may pose challenges in finding a counterparty at favorable prices in certain market situations.

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