In November 2016, I wrote about using ITM calls as a cheap stock substitute using OZL as an example. We bought some Feb-17 $6 dollar calls for $2.02 when the stock was trading at $7.94. The trade has worked out well as OZL continued its uptrend and was trading at around $9.30 on 8 February 2017.

OZL chart 8-Feb-2017

When we bought the February calls, the delta for those calls were 0.9016. The delta is now 0.9999 and we can take some profit off the table by “rolling” (i.e. sell one option and simultaneously buying another) up to a higher strike price. As the uptrend still looks healthy, I decided to buy the May-17 $7.50 call option which has a delta of 0.9076 as shown in the option chain below. As the $7.50 option is cheaper than the $6 option, I was able to lock in profits of $1.375 per share, and still participate in further upside from this stock while reducing my risk.

ozl chain

The share price has risen some 17% ($9.30 – $7.94) since November but my $6 call option has appreciated 63% ($3.29 – $2.02). Furthermore, if I sold the stock to realise profit, I will not be able to participate in further gains. This is another benefit of buying ITM options instead of stocks.

Overall, I have found ITM calls to be a great substitute for stocks when trading stocks purely for capital gains. The only downside I have found is the lack of liquidity so the bid-ask spread can be quite large compared to the bid-ask spread in the stock price.

 

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