InvestorQ : I find that a lot of deep OTM options are available really cheap. Is it a good idea to buy them since my risk is limited?
Lavanya Subramanian made post

I find that a lot of deep OTM options are available really cheap. Is it a good idea to buy them since my risk is limited?

Answer
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ishika Banerjee answered.
1 year ago


This is quite common among retail investors. They buy a deep out of the money all or put just because it is very affordable. That is a bad idea. Such options are cheap because that is what they are worth. They only have time value and markets are assigning a low price to them because the probability of scaling the price is quite low. Don’t just buy options of distant strikes just because they are available at low prices. The option will most likely expire worthless. This is called the visual effect. Don’t get carried away by the cheap option argument. Always calculate the value of the call or put using the online Black & Scholes that is available in your trading terminal before buying any deep OTM option.