Examining ITM Options Among Retail and Professional Traders

A significant amount of research has focused on at-the-money (ATM) and out-of-the-money (OTM) options due to their liquidity and leverage effects. However, little attention has been given to in-the-money (ITM) options.

Reference [1] addresses this gap by studying ITM options, particularly in the context of retail traders. The author pointed out,

This study fills the gap by highlighting the economic significance of ITM options and examining the behavioral and economic factors that influence investor preferences for these lower-leverage instruments. ITM options, particularly those with short maturities, have become increasingly popular with retail investors due to their perceived higher probability of payoff and the potential for consistent, albeit smaller, returns. By constructing one of the most comprehensive open-close option databases, covering 70% of the equity options market, I provide new insights into the trading behaviors of small customers, who drive much of the ITM options activity.

Among the findings, I observe that ITM options capture a significantly larger share of the dollar volume traded by small customers, especially in large-cap stocks and short-term contracts. Retail investors, as evidenced by social media data from StockTwits, are particularly drawn to ITM call options during periods of heightened retail attention, often focusing on high-priced technology stocks. This trend persists even when controlling for stock returns, volatility, and news volume, suggesting that social media plays a critical role in shaping retail trading behavior.

In summary, the key findings are:

• ITM options deliver more stable returns, reinforcing the idea that retail investors are attracted to their higher probability of generating positive returns in short-term strategies.

• The average dollar volume of ITM options exceeds that of OTM options for trades made by small customers. This trend is less noticeable for options traded by professionals and firms.

• Small customers trade a higher dollar volume of ITM options for maturities of less than seven days.

• The dollar volume of ITM call options traded by small customers is predominantly concentrated in large-cap technology stocks.

This is an interesting study. We believe that ITM options can be beneficial not only for retail traders but also for professionals.

Let us know what you think in the comments below.

References

[1] Edna Lopez Avila, In the Money? Low-Leverage in the time of Option Betting, 2025, MIT