Why don't people just buy ITM call options since they seem like a surefire profit?

So I was reading up on call options and just wondered why don't people just buy ITM options and almost guarantee them a profit?

For example, let's say stock XYZ currently trades at $5 per share as at 31/1/2021, and I buy a XYZ $3 call option which expires February 2021. Doesn't that almost guarantee me a profit minus the premiums paid? So why don't more people do this?

3

Discussion (3)

What are your thoughts?

Learn how to style your text

Chris

31 Jan 2021

Owner and Writer at Tortoisemoney.com

An option price is made up of two parts: Intrinsic and Extrinsic value.

Intrinsic value (for calls) is the (Current price - Strike). Meaning if the current share price is $10 and the strike is $9, the intrinsic value is $1. So buying ITM options would all have intrinsic value.

Extrinsic value is made up of time value and implied volatility. This part is a bit more complicated, but generally, the further out an option, the higher the time value, hence, the higher the premium. Implied volatility just refers to how volatile the stock is. For example Gamestop has crazy high volatility now. So the more volatile, the higher the option premium.

So back to your question, assuming you buy an ITM option, you will already pay for the "guaranteed profit" as it is in the intrinsic value. On top of that, you will pay for the extrinsic value as well. So it is impossible to buy an ITM call option and exercise for profit. Remember, every call option is sold by another person or market maker. No one would sell a sure win option to you, because that would be a sure lose option for them.