How do you know what strike price to buy?

[marcoPolo21]

McMillain's - Options as a Strategic Investment, is
an excellent [close to 1000 page] book on options

[you don't even need the newest edition]
a used copy on Ebay can be delivered to your door for $5.00

marc

 

[Ryan81]

How about reading some books like the rest of us?

Go easy on this one... We need people like this in the market to be our counter-parties

 

[water7]

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.

best answer for a lot of similar threads on this forum

 

[Handle123]

Go easy on this one... We need people like this in the market to be our counter-parties

I love profit parties from all those that don't read the books, ya just wish they have 30 credit cards so they can keep making out those checks telling all their friends "I am so close". But books are only the beginning as books show what the majority of folks are learning, you read as much as you can of what the average trader are believing in so later on you can make those folks pay the price of believing in the books and the hard part are the "missing chapters" of books. There is literally hundreds of reasons of why the 95% fail and the 5% make the money, often times it is perseverance.

 

[zdreg]

Not a profession for lazy individuals, I know of a few hard working ones that still suck at it, cant imagine lazy!

there is more than a small difference between working smart and working hard
in trading if your brain is not wired for successful trading working hard won't help you.

 

[FreakofNature]

there is more than a small difference between working smart and working hard
in trading if your brain is not wired for successful trading working hard won't help you.

No doubt !

 

[Steven Leeds]

I never knew how options traders buy their strikes based on what merit....
What price?...
How do you know it's the right price to buy at for your strategy...
buying calls, buying puts? Old school style. How do you know what to buy?

1. In order to better understand options, options pricing, and buy/sell decision making, most of us have read at least some of the better literature available to us to, Here's what I have in my library;
   
   -Option Pricing & Volatility (2nd Edition)..Sheldon Natenberg
   
   -Options as a Strategic Investment (5th Edition)..Lawrence G. McMillan
   
   -The Complete Guide to Option Selling: How Selling Options Can Lead to Stellar Returns in Bull and Bear Markets (3rd Edition).. James Cordier and Michael Gross
   
   - Options, Futures, and Other Derivatives (9th Edition)..John C. Hull
   
   - Getting Started in Options (8th Edition).. Michael C. Thomsett
   
   - Option Spread Trading: A Comprehensive Guide to Strategies and Tactics..Russell Rhoads
   
   - Trading Weekly Options ..Russell Rhoads
   
   Plus more.
   
   
2. Use a trading platform to study the daily markets for some time before committing capital to the game. Learn how options are priced as compared to the underlying and how options prices.
   
   
3. Have a Trading Plan and a Trading Strategy. In writing.
   
   
4. Know which of the 20+ options strategies you plan on trading. Buy a Put or Call, Sell a Put or a Call, Buying or selling a Straddle or Strangle, Buying or Selling a Credit or Debit Spread, Ratio Spread, Calendar Spread, etc. What strategy(s) you chose will help determine what to buy or sell.
   
   
5. Study the options you plan to trade. Stocks, Bonds, ETFs, Furtures, etc. What time do they trade, are the Weeklys, EOMs, Serials, etc. Which exchange(s) do they trade on?
   
   
6. Study the free stuff that the industry makes available to us. CME, CBOE, BOX, ISE, OCC, OIC, etc.
   
   
7. Know what the markets are doing elsewhere (e.g. Asia, Europe, etc.) before the markets open here. Dozens of websites to help with that during the pre-market hours. At the same time watch the U.S. pre-market activity. Are the index futures (ES, YM, NQ, etc.) up or down? That will help you understand what drives the market and how it affects options pricing. Going to trade a specific stock symbol? E.g. AAPL, MSFT, etc. then pay attention to pre-market news and activity. That may help in your decision making also.

Like others here I trade credit spreads. In my case mostly on the ETFs (SPY, IWM, EEM, QQQ, DIA, etc.) My entry and exit points (i.e. what prices do I buy and sell at) are based on IV, %OTM, Delta, Distance the Puts or Calls are from the ATM price (at lease 1.5x 1SD), Time Remaining, and some other factors. I do not set stop loss orders but do manage the trade based on constant monitoring of market activity (using a smartphone app when necessary), how close the spread is to being ATM and then decide whether to close it or roll it.

Hope this helps.