Could you explain how it is possible for someone to purchase call options with a strike price of $70 for a stock currently priced at $100, with expiration in 6 months?

When analyzing this scenario, it’s essential to understand the fundamentals of options trading. A call option gives the holder the right, but not the obligation, to buy an asset at a specified strike price before the option expires. Generally, when the strike price of a call option is significantly lower than the current price of the underlying stock, as in this case ($70 strike vs. $100 stock price), the option is said to be “deep in the money.”

Purchasing deep in-the-money (ITM) call options can seem counterintuitive given their intrinsic value, which is already very high compared to out-of-the-money options. However, there are strategic reasons an investor might choose to do so:
Leverage with Lower Capital: Buying a deep ITM call option allows investors to control a large number of shares with a smaller capital investment compared to buying the shares outright. The investor benefits from the option’s intrinsic value and any potential additional increase in the stock’s price.
Higher Delta: Deep ITM call options have a delta (sensitivity of the option’s price to changes in the price of the underlying asset) close to 1. This means that the option’s price will closely mirror changes in the stock’s price. Therefore, an investor who is confident about the stock’s future appreciation might choose deep ITM options to closely track the stock’s performance while investing less capital.
Risk Management: Some investors use deep ITM options as part of a larger strategy to limit risk. The cost of the option serves as a maximum potential loss, which is typically less than buying the stock outright, while still providing upside potential.
Lower Time Value Premium: Deep ITM options are comprised largely of intrinsic value with a smaller proportion of time value. This can make them less affected by theta (time decay), which reduces the option’s price as the expiration date approaches.

In essence, while it might seem unusual at first glance, buying deep ITM call options can be a strategic move aimed at benefiting from the stock’s appreciation with a limited capital investment and defined risk.