Why Is a Short-Term OTM Option Considered a High-Risk, High-Reward Trade? ▴ Learn

Why Is a Short-Term OTM Option Considered a High-Risk, High-Reward Trade?

A short-term OTM option is high-risk because its premium is entirely time value, which is rapidly decaying (high Theta). It has a high probability of expiring worthless.

It is high-reward because the low premium offers immense leverage; a small, quick move that pushes it ITM can lead to a massive percentage return on the small capital invested.

What Is the Likelihood of an OTM Option Being Exercised?

How Does a Long-Term Equity Anticipation Security (LEAPS) Option Differ in Terms of Theta Decay?

How Does the Relationship between Delta and the Probability of an Option Expiring In-the-Money Affect Trading Strategy?

Explain How Selling an Option (Receiving Premium) Impacts a Trader’s Leverage and Risk Profile