In the money stock trades refer to the purchase or sale of options based on stocks at a lower strike price than the current market value. This trade is beneficial to traders because it allows them to buy stocks at a discounted price. In addition, in the money stock trades also offer traders the opportunity to profit even if the stock price falls in the future.
Out-the-money stock trades, on the other hand, refer to the purchase or sale of stocks at a price that is higher than the current market value. This trade is beneficial to traders because it allows them to sell their stocks at a premium. In addition, out the money stock trades also offer traders the opportunity to profit even if the stock price rises in the future.
The following are ten key differences between the money and out the money stock trades in Hong Kong.
Table of Contents
Profit opportunity
In-the-money stock trades offer traders the opportunity to profit even if the stock price falls – to a certain extent Out the money stock trades, on the other hand, only offer traders the opportunity to make a profit if the stock price rises beyond a certain level.Risk level
In-the-money options are considered to be less risky than out the money options, and are accordingly more expensive. In-the-money stock trades offer traders a lower chance of losing money if the stock price falls.
Reward potential
In-the-money stock trades typically have a lower reward potential than out of the money stock trades. For traders to profit from in-the-money stock trades, the stock price must fall by a more significant amount than it would for out-of-the-money options which are cheaper, and will be valuable should they later become in-the-money.
Break-even point
The break-even point is the price at which a trader will make neither a profit nor a loss. Above this point, an option is in the money, and below it is out.
Time commitment
Depending on the time left before option expiry, out-the-money trades may be more or less profitable, as they will have a shorter time in which they may become in the money.
Market conditions
In-the-money stock trades are more likely to be profitable in bearish market conditions. Out of the money stock trades are more likely to be profitable in bullish market conditions.
Entry point
Entering an options trade that is already in the money will often be more expensive, but can also come with greater surety in not expiring worthless. The closer the entry point is to the option strike price, the more expensive an out-the-money option will be.
Exit point
The ideal exit point for in-the-money stock trades is when the stock price has recovered from its 52-week low. The ideal exit point for out-of-the-money stock trades is when the stock price approaches its 52-week high.
How to trade in-the-money stocks
Identify a stock that is trading at a discount
The first step to trading in-the-money stocks is identifying a stock trading at a discount. You can do this by looking for stocks trading below their 52-week low.
Place a limit order
Once you have found stock trading at a discount, the next step is to place a limit order. A limit order is an order to buy or sell a security at a specified price.
Monitor the stock price
After placing your limit order, it is crucial to monitor the stock price. Wait for the stock price to fall to your target price before selling.
Sell the stock
Once the stock price has fallen to your target price, you can then sell the stock, allowing you to make a profit even if the stock price falls further. You can also ask your stockbroker to provide you with a trailing stop order, automatically selling the stock if it falls to a specific price.
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