A Different Way to Use Options By Larry Benedict, editor, Trading With Larry Benedict Options have been a part of my trading life for as long as I can remember. They’re one of the most versatile tools out there. I often use them with my mean reversion strategy. That’s where I look for stocks that have overshot in one direction and aim to profit when they snap back the other way. If all goes to plan, I can be in and out of the trade anywhere from a day or two to a couple of weeks. And I have clearly defined risk, too. But while options can be a great tool in short-term trading strategies, they can also be applied to other circumstances. So today, let’s check out another way that you can benefit from using options… Intrinsic Versus Extrinsic Value One misconception some folks have is that options are only for short-term use. Someone who is bullish on a stock might only buy a call option right before they expect the stock to rally sharply. For longer moves, they just buy the stock directly. After all, options expire, so the clock is always ticking. If the move doesn’t pan out right away, you run the risk of the option losing a big chunk of its value… or even expiring worthless. These are valid concerns. But it’s not the only way to use options. We also need to consider the option’s strike price… When traders use options to capture short-term moves, they typically use options that are trading around the current stock price (at-the-money) or away from the current stock price (out-of-the-money). In these instances, the option has no intrinsic value. Its value is all extrinsic, which means it comes from factors such as volatility and the option’s time until expiration. Note that a call option has intrinsic value if its strike price is below the current stock price. (Put options have intrinsic value when the strike is above the current price.) For example, if a stock is trading at $100, a $90 call option has $10 of intrinsic value. If that option were trading at $15, then $5 of its value would be extrinsic. In this case, the $90 call option is in the money. And deeply in-the-money options can be a handy tool to capture longer-term moves… Tune in to Trading With Larry Live 
Each week, Market Wizard Larry Benedict goes live to share his thoughts on what’s impacting the markets. Whether you’re a novice or expert trader, you won’t want to miss Larry’s insights and analysis. Even better, it’s free to watch. Simply visit us on YouTube at 8:30 a.m. ET, Monday through Thursday, to catch the latest. | A Substitute for Buying Stock Let’s stick with that same stock that’s trading for $100. If I thought it was going to rally over the next six months or more, I could buy 100 shares for $10,000. But let’s consider an alternative. Instead of buying shares, I could buy a deeply in-the-money call option with a strike price of $70. By buying an option instead of shares, I could gain access to the move for a fraction of the cost of buying the shares. Since an option contract is for 100 shares, I would only need to buy one contract for similar exposure to the trade. And one contract might only cost somewhere between $2,500 and $3,500 – or roughly a third of the cost of buying the shares. Because the option is so deeply in the money, though, its delta will be extremely high. (Delta gauges how much an option price should change for each $1 move in the underlying stock.) In-the-money options can often have a delta of around 0.95 to 1.0. That means that the option will gain value at almost the same rate as the underlying stock. Better still, the option’s price will be buffered by its intrinsic value. Its extrinsic value, from factors such as volatility and time decay, will have a far smaller effect on the option’s value. This can be beneficial if the market goes through a period of heightened volatility. And time decay is not going to start chewing up all of the option’s value as you close in on its expiration date. So buying deep in-the-money call options can be a great way to gain exposure to an anticipated move higher in the stock… at a fraction of the cost of buying the underlying shares. That frees up your capital for other trades. So just remember… Options strategies can tackle a wide array of potential setups. You just need to look for one that suits your needs. Happy Trading, Larry Benedict
Editor, Trading With Larry Benedict Free Trading Resources Have you checked out Larry’s free trading resources on his website? It contains a full trading glossary to help kickstart your trading career – at zero cost to you. Just click here to check it out. | | 
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