How do you know what strike price to buy?
- Thread starter tradingacct1
- Start date
The answer to your question is complex, and rests on what your strategy is.
But in very, very basic terms, a straight options buyer of calls or puts is going to be betting on a rise or fall in the underlying instrument (stock, index, etc.) So that buyer will need to decide on which STRIKE PRICE of the option to buy. You will see strike prices and expiration dates listed on the options chains listings.
Why would you select one strike price over another? There are many reasons, but one of the more important is options DELTA, or the measure of how much the put or call will be likely to move in relation to the underlying instrument. An option with a higher delta will move more than one with a lower delta.
So, let's say for example that you want to buy a call on XYZ, priced at $50. You look at the options chains (list of strikes and expiration dates), and see that a call with a strike price of $45. has a higher delta than a call priced at $50. And your strategy is that you are looking at a quick move up in XYZ. So you might opt to buy the lower strike call with the hope that you will generate a big move. (Not all options chains or listings show Delta, but many do. And Delta in itself is worth hours of discussion.
Another big consideration is the EXPIRATION DATE of the option, because that can also impact projected movement of the option price. In general, an option with a closer expiration date will move faster that one with a date farther out. But like Delta, this too is worth hours of discussion.)
So in answer to your question, you're seeing such a range of prices, strikes, and expiration dates in options listings because each offers a buyer a different flavor of option that may be more helpful to his or her strategy. And every options trader is going to have a different viewpoint, based on experience and strategy. It also illustrates the complexity of options trading, and why a trader should not get involved until he or she can successfully develop and trade a strategy for the underlying security.
I gave it much thought and being that it is complicated, original poster lacks knowledge and memorizing which strikes to us when. Not everyone use them in same ways like using the Greeks for instance, in my ways of using options as either Hedging or option decaying. Hedging for instance is more complicated and have less ability to use the Greeks, underlying for example is dropping, whatever I buy close to price will be at a Premium and each have different value. Whereas selling them, each option has more to use the Greeks as some can be of mismatched Premium. The original poster doesn't want to put in the hours to learn as this subject of options is not going to be learned right by us posting about it, He is going to maybe learn bits but since he has lack of knowledge, and can't even fathom his strategy, what are you going to advise how to select best options? In my case I am directional trader, so I use partial of the Greeks, whereas some traders only use the Greeks staying Delta neutral, many terms use in options and do you want to hold his hand all the way through finding best options for all the different ways to use them? Not much thought was given?
I am glad you think this way, less to compete against to get better prices/more traders losing money. I have learned to reduce risk when buying/selling the underlying. But selling options have limited profit where buying a stock you have unlimited capital appreciation and possible dividends. Most traders who hedge has learned well on how to use them where mostly never have to lose on hedges. To me not using hedges makes for undue losses.
They seem purposefully obtuse at this point, possible just a troll.
During Odd Months, select even strikes and vice versa during even months.
Great question. It's like asking a neurosurgeon "Hey man, how you did that 12 hour head surgery? Can you share in 30 sec max - I need all the details and why you did exactly like you did and not the other way? I may do it just as well as you did. In a couple of weeks. So just tell me. Appreciated. Yeah and what are all those shiny tools - you use it? You sure you need it? Thought I could use that one for my bike".
I used to date a lady who was essentially a neurosurgeon (she was a pediatric invasive neuroradiologist, to be exact) and when I'd ask he "how did your day go?" she was able to explain what exactly she did and why. A truly competent professional should be able to explain his actions and thought process to an intelligent layman.
As a trader, when structuring a trade you should be able to explain why you are buying/selling a specific strike, maturity or size and if you can't that means your strategy is not well defined. Also, a lot of people define strikes by simulation/backtest but can't really explain why a specific change produces the results they want.
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Well, if you can understand specifics of a neuro surgery or a rationale behind options strategies without first going all the way through Med School or spending years in the market and what is important - your level of understanding implies you can repeat these things by yourself knowing exactly what you do after these brief intros - my hat's off to you.
And I'm not here to argue, sorry. Just expressing my opinion based on MY experience. Of course "experience may vary". No doubt about that.
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Understanding at the base level does not imply an ability to replicate, even with appropriate experience. E.g. partners in a fund wouldn't (and should not) be able to replicate a strategy after a PM explains it to them, but they certainly understand the logic and the risks.
PS. Anyway, my market's closed and I am gotta drive home.
PS. Anyway, my market's closed and I am gotta drive home.
Exactly. But when people start asking very general questions about stock strategies/rationales behind it - I can reasonably assume they do it because they want exactly to replicate it (if it is successful). What is the point of understanding a strategy if it is not successful - we all already have 100s of it each. Again, I'm not saying you are wrong - rather we are both right.
PS. Have a safe drive home.