hi etradehome & everyone,

what are the advantages of selling ITM (short guts) as opposed to selling OTM?

is it becos selling ITM gives more time value than OTM if both are same distance from strike price? time decay faster for ITM option than OTM?

any other advantages of selling ITM than OTM? Margin lower? higher liquidity?

any disadvantages of selling ITM as opposed to OTM?

many thanks in advance. cheers

***
hi etradehome & everyone,

what are the advantages of selling ITM (short guts) as opposed to selling OTM?

is it becos selling ITM gives more time value than OTM if both are same distance from strike price? time decay faster for ITM option than OTM?

any other advantages of selling ITM than OTM? Margin lower? higher liquidity?

any disadvantages of selling ITM as opposed to OTM?

many thanks in advance. cheers
***

sell ITM is short gut selling OTM is short strangle.
I am a strangle seller so for me OTM is better.

Short guts and short strangle, I have not really compare margin before. Anyone know which has lower margin assuming same strike same month ITM and OTM?

As far as I know liquidity for OTM and deep deep ITM has not much liquidity I would say it is about the same.

Selling OTM is easier for me to understand my position, selling ITM harder to understand the profit / loss and the rolling, that is just me.

In term of time value I find it almost the same in the ES Futures Options. ITM and OTM. Although Sun mention that ITM has more time value as compare to OTM. But not for the ES Futures Options as far as I am concern.

ES - Emini S&P 500 Futures Options

from what i know, i think itm options require a higher margin while otm options a lower margin.

did a quick lookup, yes, futures options like ES does indeed has higher time value options which in a way make it attractive as a candidate for option sellers like us. :)

i think the more obvious difference between short guts and short strangle is that short guts in a practical sense will require a seller to do more roll over than a short strangle seller.

however, correct me if i am wrong, for short guts, the roll over effect gives the seller a "good" feeling that its a profitable type of roll over, while in short strangle, the immediate effect is a "loss" type of feeling. of course, the common thing between them is that only rolling out into further month with sufficient time value will actually repair the damage (delta damage in short guts; obvious damage in short strangle) in the two strategies.

keep the sharing going. :)

ky

Hi WinOption, Dave and KY,

It was a very good online Q&A session. For the excellent contents there, $0.20 for each of you.

We also shortlist KY's comment for the June's 'Posting of the Month' for its short, precise and accurate posting.

Anyone to share?

Etradehome.com

Hi Winoption,

OTM options writing requires lower margin requirement. That means you can sell more contracts with the same amount of money. Here is the example:

Take SPY as example. SPY is at $135 now.

Selling 130 call (ITM) ties your margin up by $3400.
Selling 140 call (OTM) ties your margin up by $2200.

But if you look closer, the difference is not that big. Only if you sell much further out of the money, such as 150 call, the margin will drop to $1200. At 150 call, the premium is only $0.10. Not worth doing at all.

I personally prefer ITM call and put selling because the margin requirement is not as high as we thought. I have the tendency to sell more contracts when it comes to OTM options writing. ITM options writing is my No.1 strategies, I use OTM options selling occasionally whenever a stock gaps too much in the opening minutes.

I also agree with KY, the rollover and repair in ITM options writing gives you a nice feeling. I bought back the options at a profit, only to lose temporarily on delta.

Thank you!

Hanz

I think it is a misconception that a lot of people think that the margin is higher for ITM and OTM options. In general because of the put call parity and the way SPAN margin work (I am referring to futures options and not stocks options) the ITM and OTM margin is almosts similar.


It is also not true that selling OTM will allow you to sell more contract.

OTM has no intrinsic value thus the margin is low and premium is low
ITM has intrinsic value thus the margin is high and premium is high too

when you sell a ITM options even thou margin is high but remember you collect a lot of intrinsic value and this is added back to your trading capital.

If you work it out the margin is almost similiar

Good point there Dave. More intrinsic value in options selling will add on to the 'equity with loan'. I forget about this point.