Why would someone buy $2.3 billion in deep ITM SPX call options?
CPI cool down to 2.5% in Aug, lowest level since 2021. It is a good signal for the markets. I was looking through option flows of unusual activity last night and found that $2.3 billion in total in premiums was paid last week for SPX calls for 06/20/25 with a strike of 4000 and 5000. It is strategy call long deep-in-the-money long-term call, since SPX is now trading around 5500. Why would someone buy $2.3 billion for an option instead of buying stock or index itself? What are the advantages and potential risks associated with this strategy?
Understanding Deep ITM long-term Calls
Deep ITM options are those where the strike price is significantly lower (for calls) or higher (for puts) than the current market price. In this case, the purchase involves SPX calls with strike prices of 4000 and 5000, while the SPX is trading around 5500. These options are considered "deep" ITM because the strike prices are substantially below the current index level.
Long-term options are those with expiration dates that are far in the future, typically more than one year. It provides a longer timeframe for the option holder to realize potential gains.
3 Benefit and when to use it
Benefit 1: Greater return
One of the most compelling advantages of deep ITM calls is the leverage they provide. For example, if you purchase SPX and the same SPX call option mentioned above (expires on 06/20/25 with a strike price of 4000) at the beginning of the year (Jan 2, 2024), SPX yields a 15% return, while the option could provide a 48.42% return. This means you achieve over 3 times higher gains with the option.
Benefit 2: Less cost
Options help you allocate your funds more efficiently. For gaining 100 shares of SPX exposure, it directly would cost you about $550,000 (5500 index current price * 100 shares). In contrast, a deep ITM call could offer same exposure for a much lower premium, costing around $159,000 (1590 option current price * 100 contracts). This capital efficiency frees up funds for other investments or strategies, enhancing overall portfolio performance.
TIPS: $S&P 500 Index (.SPX.US)$ options are relatively expensive for retail investors. Investors looking for a lower-cost alternative may consider $SPDR S&P 500 ETF (SPY.US)$ options, which also track the performance of S&P 500.
Benefit 3: Less downside risk
Deep ITM calls inherently come with a built-in risk management feature. When you purchase these options, your maximum potential loss is limited to the premium paid, unlike owning the actual shares where losses can be more substantial if the market declines. This makes deep ITM calls a safer way to gain exposure to the underlying asset. Additionally, because these options are deep ITM, they have high intrinsic value and are less affected by time decay (theta) and volatility (vega), providing a more stable investment over the long term.
When to Use Deep ITM Long-Term Calls:
– When you have a strong bullish outlook for a stock over a long period and be ready to buy-and-hold.
– When you want to gain exposure to a stock without using as much money as buying stock directly.
– When seeking leverage with lower risk compared to margin trading.
– When you want to minimize the impact of short term volatility on your option.
– When you wish to minimize the impact of time decay on your option.
Despite the lower capital outlay, we investors are still exposed to market risk. If the SPX declines significantly, the deep ITM calls will lose value. For we investors, understanding and potentially employing similar strategies can offer a new dimension to portfolio management. However, it's essential to thoroughly understand the mechanics, risks, and implications before diving in.
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only.
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a AU-based investor focus on US & AU markets. I am CFA charterholder and hold MSc degree in Food Science from UNSW🦘
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Rookie baby : Is that deal an organization deal?
MONTA CFA OP Rookie baby : I think so. Like hedge fund often engage in large options trades
Tonyco : I don't quite understand. I thought if it was too far away from strike in either direction it wouldn't be ITM.
So I could buy a .01 call for anything and gain off it? That doesn't seem right?
MONTA CFA OP Tonyco : Theoretically u r right if u can find $0.01 option. However, you won't be able to find such an option. Bcoz the deeper ITM an option is, the more expensive it becomes. Such an option would not be priced at $0.01 because it already has high intrinsic value. You can go to check the price of the most ITM (lowest strike price for call, highest strike price for put) option of any stock, it would be the most expensive one. Hope this clarifies your confusion :)