Option - Leverage

[FrankCFA]

Out-of-the-money option will provide more leverage than in-the-money option because it’s cheaper. Is this statement correct? Thanks.

 

[BlueTrin]

I think you are correct, you can buy more of them, so if they become in the money, you will make much more provided you are fairly deep in the money.

 

[FrankCFA]

Thanks, how about option writer?

 

[S2000magician]

When one party has more leverage in one direction, the other party has (equally) more leverage in the opposite direction.
It’s a zero-sum game (excluding brokerage fees).

 

[FrankCFA]

Thanks, it’s interesting because sometime I heard the portfolio manager sold the option and put the strike very far from spot. They said it’s safe. I don’t realize it will increase overall portfolio leverage ratio as well.

 

[BlueTrin]

The idea is that the market (i.e. excluding the market makers) is usually long protection, therefore writing options usually is a profitable business. By selling the tails you can make income as there is more demand for buying options than selling them.
The problem is that if it hits the tails you may be liable for large amounts. Normally overally if you do not write large amounts of it and hedge a bit with more liquid options when it goes against you, you should be making money …
See it as an insurance against large losses and it will all make sense.