Should I be buying out of the money options?

[Paul Beck]

[Justin Freeman]

The answer to this question to a large extent depends on whose money you’re using. There is a long exchanged anecdote about a professional/institutional trader buying out of the money options – it’s one that relates more to the remuneration structure at City investment firms but is a valid enough means of explaining why you might want to. Take trader A. It’s December, she’s met all of her trading targets for the year, her performance related bonus has been agreed and signed off and will hit her bank account in March. Whilst treading water in the Christmas markets and waiting for the new trading year to start in January she makes a profit on a few small trades. The old story goes that rather than waiting for the P&L to be posted to the previous year (that she’s already had performance related bonuses agreed on) she instead buys some long dated, out of the money options that might, just might, make a profit in the next trading year. Looking at the FTSE Index options market with Dec 2019 expiry. Underlying Index is trading somewhere around 7100. Buying puts with a Strike Price of 5000 costs a premium of 24.7 and buying calls at 8,100 strike costs 35.7

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