Using Delta and Open Interest to Help Choose a Strike

A

artvandaley

Hello all,

I've been experimenting with a variety of options strategies for about a year now. Up until the market collapsed earlier this year, I was doing okay. Had a couple of big winners but a bunch of small losers. I'm begining to ease back into options with selling puts on stocks that I want to own long term, and buying calls (and shares) on stocks I am very bullish on, this thread focuses on the call buying.

Previously, I seemingly chose and bought my call strikes at random, almost like pulling numbers out of a hat, I can't do that going forward. I need to take at least some of the guess work out of choosing a strike price. So I am hoping some members could share their thoughts on what they look for when buying calls. For example, do you typically buy a strike with a delta value of .5 or .6 or .7 etc. Or do you forgo the delta or the other Greeks and just go with itm, atm, or otm? What about open interest, if a strike you wanted had little interest, but a higher or lower strike had considerably greater open interest, would you change your mind and choose the strike with greater interest? The calls I plan on buying will be 6 - 12 months out.

Thank you for the help
 
What I have begun doing:
When I have a target! Meaning I pick the price, time, IV change expected!
Then, use that information to derive the ordered by Return On Risk candidate trades by looking at risk defined long options as well as verticals in the appropriate Expiration!
So, if my target is close, the trade choice will be near optimum (for the solution set you address).
If your data provided is great, your results are great.
While you can guess, buy pulling a "delta" target from your nether region, you can do this an arrive at whichever would be the most optimal. Depending on underlying and market conditions, this exercise may or may not be overkill!
 
Hi there,

Thank you for your reply! To simplify, are you saying you come up with a price target and time frame at which you expect/hope the underlying to rise to, and then buy that strike? For example, if the underlying is currently trading at $20, and you expect it to rise to $30 by the end of the year, you then buy the Dec/Jan $30 strike?
 
No!
Will make up an uneducated projection on SPX as "fodder" for this exercise.

ASS-U-ME you know that SPX is expected to increase in price +10% by July 3rd of this year, and you expect the volatility (ATM IV) to decrease 20%, You could have a tool to aid the candidates such as this:

CRITERIA Used: Time?=Now->20200429.1315, term =SPX200717, Symbol= SPX, days=65, uChange=+10.0%, ivChange=-20.0%
EntrySlippage->0.05 MiniBA spread:0.75 Commission:1.30 Candidates->5
Target date = 20200703 is on day# 5 of the week (Mon=1...) Database is "xxxx"
U= 2932.38, Target U-> 3225.62
ATM IV= 0.28, Target ATM-IV-> (0.24 -> 0.19):(0.25 -> 0.20)
Results of evaluation listed below:

Summary in ROR order for each type
ROR Type Description Order type
111 % Call Spread 50 3250 / 3300 Buy to Open
108 % Call Spread 25 3250 / 3275 Buy to Open
93 % Long CALL SPX200717C3250 Buy to Open
11 % Put Spread 50 2350 / 2400 Sell to Open
10 % Put Spread 40 2350 / 2390 Sell to Open
10 % Put Spread 20 2380 / 2400 Sell to Open
10 % Put Spread 30 2350 / 2380 Sell to Open
9 % Put Spread 10 2390 / 2400 Sell to Open
9 % Put Spread 25 2325 / 2350 Sell to Open
9 % Put Spread 45 2280 / 2325 Sell to Open
9 % Put Spread 35 2290 / 2325 Sell to Open
8 % Put Spread 15 2310 / 2325 Sell to Open
5 % Put Spread 5 2320 / 2325 Sell to Open
----------------------------
As a hypothetical case.
 
stepandfetchit said:
No!
Will make up an uneducated projection on SPX as "fodder" for this exercise.

ASS-U-ME you know that SPX is expected to increase in price +10% by July 3rd of this year, and you expect the volatility (ATM IV) to decrease 20%, You could have a tool to aid the candidates such as this:

CRITERIA Used: Time?=Now->20200429.1315, term =SPX200717, Symbol= SPX, days=65, uChange=+10.0%, ivChange=-20.0%
EntrySlippage->0.05 MiniBA spread:0.75 Commission:1.30 Candidates->5
Target date = 20200703 is on day# 5 of the week (Mon=1...) Database is "xxxx"
U= 2932.38, Target U-> 3225.62
ATM IV= 0.28, Target ATM-IV-> (0.24 -> 0.19):(0.25 -> 0.20)
Results of evaluation listed below:

Summary in ROR order for each type
ROR Type Description Order type
111 % Call Spread 50 3250 / 3300 Buy to Open
108 % Call Spread 25 3250 / 3275 Buy to Open
93 % Long CALL SPX200717C3250 Buy to Open
11 % Put Spread 50 2350 / 2400 Sell to Open
10 % Put Spread 40 2350 / 2390 Sell to Open
10 % Put Spread 20 2380 / 2400 Sell to Open
10 % Put Spread 30 2350 / 2380 Sell to Open
9 % Put Spread 10 2390 / 2400 Sell to Open
9 % Put Spread 25 2325 / 2350 Sell to Open
9 % Put Spread 45 2280 / 2325 Sell to Open
9 % Put Spread 35 2290 / 2325 Sell to Open
8 % Put Spread 15 2310 / 2325 Sell to Open
5 % Put Spread 5 2320 / 2325 Sell to Open
----------------------------
As a hypothetical case.
More...
Excellent post sir. Very helpful.

However, IMHO, for me it comes down to two numbers:

1. What do I think is the expected ending underlying value at time of expiration.

2. Compare to the initial call (or spread) value, is it a good R:R?

That said, my counter parties are not stupid, they are better at assessing the outcome than me, so unless I have a better crystal ball, the long term odds are not encouraging for this mom and pop amateur retail.

Best regards,
 
Thank you for your time stepandfetchit and good to see you again ironchef!

stepandfetchit, some of the variables and parts of the querie's outcome from your last post is over my head. Mainly though, how would one forecast the IV of a particular security?

ironchef, it's funny that what you stated (#1) is how I misinterpreted stepandfetchit's first post. I truly never thought of choosing a strike in that manner.
 
artvandaley said:
Thank you for your time stepandfetchit and good to see you again ironchef!

stepandfetchit, some of the variables and parts of the querie's outcome from your last post is over my head. Mainly though, how would one forecast the IV of a particular security?

ironchef, it's funny that what you stated (#1) is how I misinterpreted stepandfetchit's first post. I truly never thought of choosing a strike in that manner.
More...
The objective seems to consist of two parts:
1) What one expects the market to do. (I am not commenting on how one can do this).
2) What trade would be best fit to maximize Return on Risk for #1. This is a mechanical operation. Kinda like looking in history at a target date, then walk further back in time to where you may have thought to enter a trade, then determine which trade worked best for you.
I want to reduce my errors, fat-fingers, senior moments, etc, where possible, and this is one area that can be aided.
 
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