Are there any investment strategies which take advantage of an in-the-money option price that incorporates no “time value”?
Options can have a negligible time premium. For American1 calls the time premium is never negative. If it had a negative premium it would be profitable to exercise it immediately. A deep in the money call has a delta of exactly one. That is, it's price movements completely mirror the price movements of the underlying stock. That means an option seller can buy stock and completely hedge his short option position. The seller of the option may be in an position to buy with very little margin and take your money and invest it. For example, consider a stock trading at $7.50, with its January 2014   $4 call option trading at $3.50. For one option, representing 100 shares, a trader could take your 350 dollars and invest it, and only use a small portion of the money to buy the stock on margin. Market-makers can typically borrow money at very low interest rates. If you have high borrowing costs, or are unable to buy on margin, then buying deep in the money calls can be a good strategy. Long story short, option sellers are making money off selling these deep in the money calls even with almost zero time premium. So, in general, there's no way to make money by buying them. 1. An American call is a call that can be exercised at any time up to and including its expiration date. "It depends on the volatility of the underlying stock. But for ""normal"" levels of volatility, the real value of that option is probably $3.50! Rough estimates of the value of the option depending on volatility levels: Bottom line: unless this is a super volatile stock, it is trading at $3.50 for a reason. More generally: it is extremely rare to find obvious arbitrage opportunities in the market." you asked for strategies which use deep in the money options:  dividend mispricing can use deep in the money options, basically its an arbitrage play on ex-dividend dates. and any kind of spread can use deep in the money options, depending on how wide you want your spread to be
My super fund and I would say many other funds give you one free switch of strategies per year.  Some suggest you should change from high growth option to a more balance option once you are say about 10 to 15 years from retirement, and then change to a more capital guaranteed option a few years from retirement. This is a more passive approach and has benefits as well as disadvantages. The benefit is that there is not much work involved, you just change your investment option based on your life stage, 2 to 3 times during your lifetime. This allows you to take more risk when you are young to aim for higher returns, take a balanced approach with moderate risk and returns during the middle part of your working life, and take less risk with lower returns (above inflation) during the latter part of your working life. A possible disadvantage of this strategy is you may be in the higher risk/ higher growth option during a market correction and then change to a more balanced option just when the market starts to pick up again. So your funds will be hit with large losses whilst the market is in retreat and just when things look to be getting better you change to a more balanced portfolio and miss out on the big gains. A second more active approach would be to track the market and change investment option as the market changes. One approach which shouldn't take much time is to track the index such as the ASX200 (if you investment option is mainly invested in the Australian stock market) with a 200 day Simple Moving Average (SMA). The concept is that if the index crosses above the 200 day SMA the market is bullish and if it crosses below it is bearish. See the chart below:  This strategy will work well when the market is trending up or down but not very well when the market is going sideways, as you will be changing from aggressive to balanced and back too often. Possibly a more appropriate option would be a combination of the two. Use the first passive approach to change investment option from aggressive to balanced to capital guaranteed with your life stages, however use the second active approach to time the change. For example, if you were say in your late 40s now and were looking to change from aggressive to balanced in the near future, you could wait until the ASX200 crosses below the 200 day SMA before making the change. This way you could capture the majority of the uptrend (which could go on for years) before changing from the high growth/aggressive option to the balanced option. If you where after more control over your superannuation assets another option open to you is to start a SMSF, however I would recommend having at least $300K to $400K in assets before starting a SMSF, or else the annual costs would be too high as a percentage of your total super assets. Short answer: No, it only matters if you want to use covered calls strategies. The price of a share is not important. Some companies make stock splits from time to time so that the price of their shares is more affordable to small investors. It is a decision of the company's board to keep the price high or low. More important is the capitalization for these shares. If you have lots of money to invest, the best is to divide and invest a fixed pourcentage of your portfolio in each company you choose.  The only difference is if you eventually decide to use covered call strategies. To have a buy write on Google will cost you a lot of money and you will only be able to sell 1 option for every 100 shares. Bottom line: the price is not important, capitalization and estimated earnings are. Hope this answers your question. "Wouldn't this be part of your investing strategy to know what price is considered a ""good"" price for the stock?  If you are going to invest in company ABC, shouldn't you have some idea of whether the stock price of $30, $60, or $100 is the bargain price you want?  I'd consider this part of the due diligence if you are picking individual stocks.  Mutual funds can be a bit different in automatically doing fractional shares and not quite as easy to analyze as a company's financials in a sense. I'm more concerned with the fact that you don't seem to have a good idea of what the price is that you are willing to buy the stock so that you take advantage of the volatility of the market. ETFs would be similar to mutual funds in some ways though I'd probably consider the question that may be worth considering here is how much do you want to optimize the price you pay versus adding $x to your position each time.  I'd probably consider estimating a ballpark and then setting the limit price somewhere within that.  I wouldn't necessarily set it to the maximum price you'd be willing to pay unless you are trying to ride a ""hot"" ETF using some kind of momentum strategy.  The downside of a momentum strategy is that it can take a while to work out the kinks and I don't use one though I do remember a columnist from MSN Money that did that kind of trading regularly." "Assuming your investments aren't in any kind of tax-advantaged account (like an IRA), they are generally not tracked and you indeed may pay more taxes.  What will likely change, however, is your cost basis.  You only pay tax on the difference between the value of the investment when you sell it and its value when you bought it. There is no rule that says once you sell an investment and pay taxes on the gain, you will never again pay any taxes on any other investments you then buy with that money.  If you own some investment, and it increases in value, and then you sell it, you had a capital gain and owe taxes (depending on your tax bracket, etc.).  If you use the money to buy some other investment, and that increases in value, and then you sell it, you had another separate capital gain and again owe taxes. However, every time you sell, you only are subject to capital gains taxes on the gain, not the entire sale price.  The value of the investment at the time you bought it is the cost basis.  When you sell, you take the sale price and subtract the cost basis to find your gain, So suppose you bought $1000 worth of some ETF many years ago.  It went up to $2000 and you sold it.  You have $2000 in cash, but $1000 of that is your original money back, so your capital gain is $1000 and that is the amount on which you owe (or may owe) taxes.  Suppose you pay 15% tax on this, as you suggest; that is $150, leaving you with $1850.  Now suppose you buy another ETF with that.  Your cost basis is now $1850.  Suppose the investment now increases in value again to $2000.  This time when you sell, you still have $2000 in cash, but this is now only $150 more than you paid, so you only owe capital gains taxes on that $150.  (A 15% tax on that would be $22.50.) In that example you had one capital gain of $1000 and a second of $150 and paid a total of $172.50 in taxes (150 + 22.50).  Suppose instead that you had held the original investment and it had increased in value to $2150 and you had then sold it.  You would have a single capital gain of $1150 (2150 minus the original 1000 you paid).  15% of this would be the same $172.50 you paid under the other arrangement.  So in essence you pay the same taxes either way.  (This example is simplified, of course; in reality, the rate you pay depends on your overall income, so you could pay more if you sell a lot in a single year, since it could push you into a higher tax bracket.) So none of the money is ""tax exempt"", but each time you sell, you ""reset the counter"" by paying tax on your gain, and each time you buy, you start a new counter on the basis of whatever you pay for the investment.  Assuming you're dealing with ordinary investment instruments like stocks and ETFs, this basis information is typically tracked by the bank or brokerage where you buy and sell them.  Technically speaking it is your responsibility to track and report this when you sell an investment, and if you do complicated things like transfer securities from one brokerage to another you may have to do that yourself.  In general, however, your bank/brokerage will keep track of cost basis information for you." The ex-dividend date, prevents this, but people are still able to do this and this is an investment strategy. There are some illiquid and immature markets where prices don't adjust.  In the options market people are able to find mispriced deep in the money calls to take advantage of the ex-dividend date. It is called dividend capture using covered calls. "Alternatively you could exercise 12000 shares for $36000 and immediately sell 7200 shares to recover your exercise price. Then you use the remaining 4800 share to pay the exercise price of the remaining 8000 options. Both scenarios are equivalent but may have different fees associated, so it's worth checking the fine print.  Tax wise: The above example is ""cash neutral before taxes"". The taxes associated with these transaction are substantial, so it's highly recommended to talk with a tax adviser. ""cash neutral after taxes"" depends highly on your specific tax situation." "Unfortunately, there is very little data supporting fundamental analysis or technical analysis as appropriate tools to ""time"" the market. I will be so bold to say that technical analysis is meaningless. On the other hand, fundamental analysis has some merits. For example, the realization that CDOs were filled with toxic mortgages can be considered a product of fundamental analysis and hence provided traders with a directional assumption to buy CDSs. However, there is no way to tell when there is a good or bad time to buy or sell. The market behaves like a random 50/50 motion. There are many reasons for this and interestingly, there are many fundamentally sound companies that take large dips for no reason at all. Depending on your goal, you can either believe that this volatility will smooth over long periods and that the market has generally positive drift. On the other hand, I feel that the appropriate approach is to remain active. You will be able to mitigate the large downswings by simply staying small and diversifying  - not in the sense of traditional finance but rather looking for uncorrelated products. Remember, volatility brings higher levels of correlation. My second suggestion is to look towards products like options to provide a method of shaping your P/L - giving up upside by selling calls against a long equity position is a great example. Ground your trades with fundamental beliefs if need be, but use your tools and knowledge to combat risks that may create long periods of drawdown." In addition to the other answers, here's a proper strategy that implements your idea: If the options are priced properly they should account for future dividend payments, so all other things aside, a put option that is currently at the money should be in the money after the dividend, and hence more expensive than a put option that is out of the money today but at the money after the dividend has been paid. The unprotected futures (if priced correctly) should account for dividend payments based on the dividend history and, since maturing after the payment, should earn you (you sell them) less money because you deliver the physical after the dividend has been paid. The protected ones should reflect the expected total return value of the stock at the time of maturity (i.e. the dividend is mentally calculated into the price), and any dividend payments that happen on the way will be debited from your cash (and credited to the counterparty). Now that's the strategy that leaves you with nearly no risk (the only risk you bear is that the dividend isn't as high as you expected).  But for that comfort you have to pay premiums.  So to see if you're smarter than the market, subtract all the costs for the hedging instruments from your envisaged dividend yield and see if your still better than the lending rate.  If so, do the trade.