In the world of options trading, there are various scenarios in which a call option with a strike price significantly lower than the current market price, which is known as “deep in-the-money” calls, could be of interest to an investor. The strike price is the price at which the holder of the option can purchase the underlying stock. Since the call option in question has a strike price of $70 and the current market price is $100, it means the option is $30 in-the-money, providing intrinsic value right from the start.
There are several reasons why an investor might purchase such options:
Lower Premium: Although deep in-the-money options tend to have a higher premium than at-the-money or out-of-the-money options because of their intrinsic value, they offer a lower investment outlay compared to purchasing the actual stock. It’s a way to gain leveraged exposure to the stock’s price movement with lesser capital.
Leverage: By purchasing in-the-money calls, investors can control the same amount of shares with less capital than buying the stock outright, thereby leveraging their investment while maintaining the potential to benefit from the full stock price appreciation.
Hedging Strategy: An investor might use deep in-the-money calls as part of a hedging strategy to protect against adverse price movements or to ensure a profit in certain scenarios.
Tax Considerations: Buying deep in-the-money calls might offer certain tax advantages depending on jurisdiction and investor status, making them a more attractive prospect.
Specific Investment Goal: Investors may have unique objectives or anticipations about the stock’s future price movement or volatility that makes this a strategically sound decision.
In sum, though purchasing a call option with a $70 strike price when the current stock price is $100 may initially seem counterintuitive, it’s a tactic that offers unique benefits related to cost, leverage, risk management, and alignment with specific investment strategies.
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