Options Strike Price Selection -- with David Moadel
hello and welcome to looking at the markets with
david modell i'm going to talk about strike price selection today
what is the best one for buying and for selling well it depends on the situation
of course and don't take my advice just because
a guy in a video told you something you have to make your own decisions do your
own research do your own due diligence and also make sure you have a plan by
the way i do help people with that so if you'd like some
coaching you can email me at david modell
gmail.com if you'd like some coaching to help you put together a trading or
investing plan if you need help with options or stock trading whatever it is
that you're trading i can usually help with that
so feel free to email me for the coaching all right so i'm on my schwab
account right now and i'm using the spy
that is the spdr s p 500 tracking etf it tracks the s p 500 it's a basket
of 500 stocks in the index
so it's not going to be something that typically moves 5 or 10 percent
in a day i mean it can but for spy uh a 40 a point 42 percent move
uh that's that's a moderate move that's a decent move for a basket of 500 stocks
right so you'd think that the call price would go up right i mean if
the underlying asset if the underlying etf
went up a moderate amount you'd think the call
price would go up not necessarily the black shoals formula
which is the formula that the options market uses
to calculate options prices yes it factors in the price of the stock
or etf or whatever the underlying asset is but it also count it also
includes other factors in the calculation
uh it includes the volatility of the underlying asset how volatile
is it how you know how big are the moves up and down
uh it calculates the time decay or theta how much time has passed how much time
is there left until expiration and it
includes the uh the strike price that's important all right that what
you know how far away is the strike price relative to the current price
that's part of the calculation in the black shoals formula
so and that is a major consideration in selecting the uh the strike price
whether you're a buyer or a seller now if usually not always if i'm going
to buy a call or a put generally i'm going to
prefer to buy something in the money all right so in the case
of a call i'm going to want to buy with a strike price
below the current price not too far below because then it
becomes expensive but oftentimes it'll be one or two
strikes in the money same with puts if i'm going
to buy a put usually it's going to be one or two
strikes in the money not always might be three or four strikes
uh it depends on the price of the of the stock or etf
uh because for example amazon you know one or two strikes
is a lot to like two strikes in the money is a lot for amazon
whereas for ford one or two strikes might not be enough because it's such a
low priced stock okay whereas amazon is a very expensive
stock all right so it's not always one or two
strikes but that's pretty typical all right so uh now again
uh the underlying etf here it went up moderately
so you'd think that an at the money call would have gone up right i mean that
would make sense and i'm using today as the strike price
all right it's going to expire today so this is
approximately at the money not exactly but it's pretty close right 315.70
versus a strike price of 316. let's see how the call did uh it did not
go up okay actually uh compared to tomorrow's
i'm sorry compared to yesterday's closing price
uh this the at the money approximately at the money
call option went down 22 or 23 all right so that just goes to show you
that buying an at the money option uh not necessarily a good idea
okay i mean this kind of you know movement in the option price
compared to the stock price you can see they diverged okay
but again this is this is part of the black shoals formula
uh the options market right now is calculating that hey you know
yeah the uh etf it went up but not enough
okay it might not even reach 316. and so the options market is not too happy
that it didn't go up enough they wanted to see it go up more
you know in comparison to the the expert the um
strike price okay let's take a look at out of the money is out of the money any
better well let's take a look at 317 that's
worse much worse down over 50 percent okay down 53
in one day mind you all right and then when you go further out of the money
it's even worse down 80 percent you get the idea
right 84 so yeah the further you go you go out of
the money the worse it is and so if you buy an out of the money option
yes you you could stand to gain more uh for example if if uh the underlying
etf here if it went up to if it went way up
today if it went up to like 330 or 340 or something
then yeah the out of the money options would have done really well
i've seen out of the money options go up 100 200
300 or even a thousand percent sometimes but what's the likelihood of that
happening what is the likelihood that uh that this
would have gone up to 330 or 335 or 340 today pretty low right
considering that yesterday it was it was around uh
i don't know 3 13 something like that okay
so that's a gamble that's that's a lot more of a lottery ticket
and i don't usually recommend lottery ticket plays
uh maybe for a small amount if you're willing to throw away that money but i
usually don't recommend it all right so what about so again let's go back to
at the money at the money went down you know it went
down even though the stock went up or the etf
went up what about in the money aha
let's look at 315 ah the in the money the one strike in the money one
it went up 11 or 12 percent how about two strikes in the money let's
take a look at three fourteen went up twenty one percent so can you
see why i'd rather buy something in the money
okay you're not asking too much of the stock or etf you're not asking it
to go up you know i don't know 30 or 40 or 50
percent okay or or even 10 you don't need that
much you only need it to go up a little bit
and in some cases you don't if if you make it a spread
trade you may not need for the underlying stock or etf to go up at all
but that's a different topic entirely all right uh what if you
go deeper in the money let's look at i went up uh 26
312 went up 29 but there's a limit to it i mean if you
bought the 300 look at that that's way in the money but
it only went up 11 okay if you bought the 290 it only went
up seven percent so there's a limit and
also buying a 300 strike or a 290 strike that would have been really expensive
i mean how many people want want to shell out you know
it gets into the thousands here okay because
this has a 100 multiplier so you have to multiply
this by a hundred if you're going to buy or sell it right
so when you go too deep in the money it becomes
prohibitively expensive a lot of the time to where you're risking a lot of
money thousands of dollars potentially and the gains you know there's a limit
to the gains all right so one or two strikes maybe
three or four strikes in the money at most is usually that sweet spot that
i look for all right as a buyer same with puts by
the way let's change it to puts this is tougher because this went up not
down okay so the puts are not going to do well on a day like this when the
stock or etf went up but let's look at the money
let's look at the 316 okay yeah got hit really hard
down 72 73 okay uh so let's look at oh i don't know in
the money which in this case would have been let's say 320 you know
lower than the uh current price current share price went
down yeah a lot but not as much 31 okay and
then you go to let's say 325 only went down to 13
okay and and the out of the money ones obviously would have been devastated
like a 310 down 93 94 you get the idea okay
so buying options uh that are out of the money
usually not recommended they do great when things go your way with the
underlying asset when it shoots up or shoots down
depending on whether it's a call or a put but
how often does that happen what's the likelihood okay
i don't recommend trading on possibilities i recommend trading on
probabilities that's the way to go now if you're a seller it's the opposite
way of thinking you want to sell something that's going
to deteriorate all right and so going back to the calls
you know if you sell something excuse me at the money or out
uh at or out of the money okay let's say if you had sold a 320
you would have done great today if you had sold it because what you had sold
would have gone down in value considerably 91 92
uh now on the other hand you wouldn't gotten paid much okay for selling that
well it depends when you sold it uh whereas
you know if you sold out the money let's do a 316 at the money
okay uh yeah you wouldn't have gained as much today just from the loss
in the option price but at least you would have
gotten paid a you know reasonable amount so you have
to weigh it out i i don't recommend selling in the money
usually there are exceptions but because as you can see if you had sold
an in-the-money call uh you would have had a loss today right
because that call option price went up you know 24 percent
okay so i like to usually sell at or out of the money options and i
usually like to buy at uh or even better in the money
options maybe a couple of strikes in the money
is pretty good or even one strike depending on the price of the stock or
etf so i hope that gave some insight into what i'm thinking as far as stock
price selection selection goes this is only a handful of
examples i only used spy you know but it's it's pretty
uniform when you when you sell uh ad or out of
the money and when you buy at or in the money generally i found
that people tend to do better they get better outcomes
most of the time not always all right so again if you want more
uh coaching if you'd like some help putting together a trading or investing
plan because you really should have one so that you know where you're going and
really know what you're doing then you can email me for that my email
address is david modell gmail.com i want to thank you for
watching and listening i will talk to you again
soon
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