What’s the difference between purchasing a stock option close to the share price vs one far from the share price, and how does it affect profit?

Question

What’s the difference between purchasing a stock option close to the share price vs one far from the share price, and how does it affect profit?

In: 0

Answer 1

Risk versus reward. You’re making an assumption that the underlying share price will make such a move before the expiration.

Options far outside the money are less likely to ever be a profitable move, but if the stock does make such a move the payoff can be large.