Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.

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Presentation transcript:

Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard

Option Strike Price Chooser Choosing the right Option Strike Price is critical to making a profit. Pick the Strike based on the highest potential return and an appropriate Delta; not necessarily ATM or just ITM as suggested in the study materials.

Option Strike Price Chooser This is accomplished by using the following information: Determine the Target price that you think the stock price will go to. Calculate the potential return through a 3-step process for each Strike price.

Example BA is trading at $98.65 and is expected to go to $103 before the July expiration.

Option Strike Price Chooser 1.Determine the Break Even price by adding the Strike and the Ask Break Even = Strike + Ask

Example Step 1. Break even is determined by adding the Strike and the Ask. (Strike + Ask = Break Even -or- $ $5.80 = $100.80).

Option Strike Price Chooser 1.Determine the Break Even price by adding the Strike and the Ask Break Even = Strike + Ask 2.Determine the profit by subtracting the Break Even from the Target Profit = Target – Break Even

Example Step 2. Profit is determined by subtracting the Break even from the Target. (Target – Break Even = Profit -or- $ $ = $2.20) Target - $103Break Even - $100.80

Option Strike Price Chooser 1.Determine the Break Even price by adding the Strike and the Ask Break Even = Strike + Ask 2.Determine the profit by subtracting the Break Even from the Target Profit = Target – Break Even 3.Determine the Potential Return by dividing the Ask into the Profit. Potential Return = Profit ÷ Ask

Example Step 3. Potential return is determined by dividing the Ask into the Profit. (Profit ÷ Ask = Potential return -or- $2.20 ÷ $5.80 = 37.9%) Profit - $2.20

Example Potential return 15% 19% 23% 31% 38% 15% (311%) (2900%) (12100%) In this case, the best return happens to be at the Strike that is ITM

Option Strike Price Chooser (Recap) 1.Determine the Break Even price by adding the Strike and the Ask Break Even = Strike + Ask 2.Determine the profit by subtracting the Break Even from the Target Profit = Target – Break Even 3.Determine the Potential Return by dividing the Ask into the Profit. Potential Return = Profit ÷ Ask

Option Strike Price Chooser Once the potential profit is identified, the process of choosing can be further refined by use of the Delta.

Option Strike Price Chooser Use of a Delta at or above 75% (below -75% for Puts) will attain more desirable results due to providing for a larger move in the option price relative to the underlying security price. Delta - The ratio comparing the change in the price of the underlying security to the corresponding change in the price of a derivative.

Option Strike Price Chooser Questions

Option Strike Price Chooser Excel Updates

Option Strike Price Chooser (Excel) Excel updates Ask column now auto updates

Option Strike Price Chooser (Excel)

Excel updates Ask column now auto updates Delta column added

Option Strike Price Chooser (Excel)

Excel updates Ask column now auto updates Delta column added Auto break-even target ATM

Option Strike Price Chooser (Excel)

Excel updates Ask column now auto updates Delta column added Auto break-even target ATM Color options added

Option Strike Price Chooser (Excel)

Excel updates Ask column now auto updates Delta column added Auto break-even target ATM Color options added Better Strike transitions (i.e. $2.5 - $5)

Option Strike Price Chooser (Excel)

Excel updates Ask column now auto updates Delta column added Auto break-even target ATM Color options added Better Strike transitions (i.e. $2.5 - $5) Redundant Month column removed

Option Strike Price Chooser (Excel)

Excel updates Ask column now auto updates Delta column added Auto break-even target ATM Color options added Better Strike transitions (i.e. $2.5 - $5) Redundant Month column removed Improved performance Improved LEAPS functionality Improved graphing All blue text/graphics are clickable

Option Strike Price Chooser (Excel) Excel updates Ask column now auto updates Delta column added Auto break-even target ATM Color options added Better Strike transitions (i.e. $2.5 - $5) Redundant Month column removed Improved performance Improved LEAPS functionality Improved graphing All blue text/graphics are clickable

Option Strike Price Chooser (Excel) Excel updates (Delta column) Due to the Delta column being added, it is very important to have the TOS platform properly configured to the right settings in order to function properly.

Option Strike Price Chooser (Excel) Excel updates (Delta column) Due to the Delta column being added, it is very important to have the TOS platform properly configured to the right settings in order to function properly. To properly configure the TOS platform, use the following steps:

Option Strike Price Chooser (Excel) Configuring TOS software Ensure the information layouts in the upper right corner of the TOS platform are set to Last X and Delta respectively. (Defaults are Last X and Net Change)

Option Strike Price Chooser (Excel)

Configuring TOS software Ensure the information layouts in the upper right corner of the TOS platform are set to Last X and Delta respectively. Ensure option type is set to Single.

Option Strike Price Chooser (Excel)

Configuring TOS software Ensure the information layouts in the upper right corner of the TOS platform are set to Last X and Delta respectively. Ensure option type is set to Single. These steps will allow the information to properly export to the Excel spreadsheet.

Option Strike Price Chooser (Excel) Questions & Demonstration