Question

A: Long one in-the-money call option with strike (current stock price −$3) and one out-of-the money call option with strike (current stock price +$3)

B: Long two at-the-money call options.

All options are on the same asset and have the same maturity.

Which one is better?

Answer 1

Both A and B are better if we take risk and return factors into consideration. If the investor wants to take more risk for getting more return then option B is better for them. Because we are buying two at-the-money call options, if the price of the stock goes up then we can buy the stock at strike prices by exercising the options and we can sell the stock in the market. The difference between the strike price and the spot price on the date of maturity will be the profit. If the stock price goes down then we don't exercise the options and the premiums paid will be the losses for the investors.

If the investors wants to take less risk then option A is good for them. Because we are buying one in-the-money call option and one out-of-the-money call option. If the price goes up above the strike price of the out-of-the-money option then both the options will get profits. If the price goes down below the strike price of in-the-money option the both the options will not get profits but the premiums paid will be the loss. But if the price trades between those two strike prices then only in-the-money option will get profits.