Leverage of Option

CFA Level III
#1

Hi All,

Just a quick question, it is said in the textbook that

“a deep out-of-the money option has higher leverage than a deep-in-the money option, but the delta of the former is less than that of the latter”

Why is this?

Assume for a call option, deep in the money means the leverage of call option is very high.Isn’t it?

Leverage= P (bond)/ P (Option), right?

#2

deep out of the money option will cost less - so P(Option) will be low. So leverage which is P(Bond)/P(Option) will be HIGH.

Deep in the money - P(Option) = High. So Leverage -> Low.

Delta OTM Option -> low, Delta ITM Option -> HIGH