Now that you know about In-the-money, At-the-money and Out-of-the-money Options, how does this influence which strike price to buy?

The key lies in the how the Option price moves with the underlying stock price. Yes, when the stock price increases or decreases by a certain amount X, the corresponding Option price may not move by that same amount X. That is, when the stock price goes up by $1, the price of a Call Option that I have bought may not necessary go up by $1.

The relationship between Option price and the stock price can be best summed up by the following table:

Type of Call Option Bought	When stock price moves up by $1, Call Option price moves up by
Deep deep in-the-money	$1
In-the-money	between $0.50 and $1
At-the-money	$0.50
Out-of-the-money	between $0 and $0.50
Deep deep out-of-the-money	$0

So which Option to buy? You can see from the table above that when you buy Options that are in-the-money, the Option price movement is closer to that of the stock price. So let’s say you bought an in-the-money Call Option and the underlying stock price has moved up by $1, your Call Option value could have moved up by $0.70. If you had bought an out-of-the-money Option, for the same movement in the stock price, your Call Option value may only have moved by $0.30 perhaps.

So buying in-the-money Options has a higher potential to make money but this comes with the equivalent potential of risk. Because, the Option price might drop by that same amount if the stock price decreased by $1!

Another consideration is with the Option price itself. In-the-money Options are more expensive than out-of-the-money Options.

In my own opinion, if I want to buy out-of-the-money Call Option, I would choose one that is not out-of-the-money too much. For instance, if GOOG stock price is $505, I would choose an out-of-the-money Call Option with a strike price of $510. This is usually when I am confident that the stock price will move in-the-money soon. If not, I would buy in-the-money Call Options to capitalize on whatever little stock price movement there is. This being said with sound money management rules in mind.

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