InvestorQ : Is it a good idea to buy deep OTM options since the premium is very low?
Bhavik Nehru made post

Is it a good idea to buy deep OTM options since the premium is very low?

Answer
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Niraj Mehta answered.
2 years ago


That can look quite tempting but it has its own limitations. Don’t just buy an option (call or put) just because the premium is very low. That is not a good approach to buying options. Quite often you may end up as a victim of the buyer’s trap in case of OTM options. When Reliance Industries is quoting at Rs.900, the call option on the Rs.1000 strike may be available at just Rs.1. That does not mean that you should jump into it. In case of deep OTM call options, the premiums are low because the likelihood of making money on such options is low. Ideally, prefer options that are at the money or slightly OTM. Avoid buying deep OTM call options just because premiums are low. That is more because that is what the option is worth! Unless you have a view that the stock could really spurt or crash, deep OTM options are not a great idea. In case you are doing it, then treat it as a risk taken on a sunk cost and leave it at that. As a strategy, buying deep OTM options is not a great idea.