Choosing the Right Option Strike Price January 12 th , 2008 Presented by: Dan Blanchard
Mar 28, 2015
Choosing the Right Option Strike Price
January 12th, 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- $95.00 + $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- $103.00 - $100.80 = $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)GR Stock Symbol Enter data into shaded fields only
$68.51 Current Stock Price
$74.60 Target Price
$5.00 Strike Price Increments
May 08 Expiration Month/Year
Strike AskBreak Even
Profit @ Target price
Potential Return
DeltaIntrinsic
ValueTime Value
5055 $15.30 $70.30 $4.30 28% 88% $13.51 $1.7960 $11.20 $71.20 $3.40 30% 79% $8.51 $2.6965 $7.40 $72.40 $2.20 30% 67% $3.51 $3.8970 $4.60 $74.60 $0.00 0% 51% ($1.49) $6.0975 $2.70 $77.70 ($3.10) -115% 35% ($6.49) $9.1980 $1.40 $81.40 ($6.80) -486% 22% ($11.49) $12.8985 $0.75 $85.75 ($11.15) -1487% 12% ($16.49) $17.2490 $0.35 $90.35 ($15.75) -4500% 6% ($21.49) $21.84
The profits represented are guranteed returns based on the target price being hit at expiration.
Time Value is not factored into these figures.
►
Chart
Clear
Import from TOS
(C lick here for ATM break-even
Option Strike Price Chooser (Excel) Excel updates
Ask column now auto updates Delta column added
GR Stock Symbol Enter data into shaded fields only
$68.51 Current Stock Price
$74.60 Target Price
$5.00 Strike Price Increments
May 08 Expiration Month/Year
Strike AskBreak Even
Profit @ Target price
Potential Return
DeltaIntrinsic
ValueTime Value
5055 $15.30 $70.30 $4.30 28% 88% $13.51 $1.7960 $11.20 $71.20 $3.40 30% 79% $8.51 $2.6965 $7.40 $72.40 $2.20 30% 67% $3.51 $3.8970 $4.60 $74.60 $0.00 0% 51% ($1.49) $6.0975 $2.70 $77.70 ($3.10) -115% 35% ($6.49) $9.1980 $1.40 $81.40 ($6.80) -486% 22% ($11.49) $12.8985 $0.75 $85.75 ($11.15) -1487% 12% ($16.49) $17.2490 $0.35 $90.35 ($15.75) -4500% 6% ($21.49) $21.84
The profits represented are guranteed returns based on the target price being hit at expiration.
Time Value is not factored into these figures.
►
Chart
Clear
Import from TOS
(C lick here for ATM break-even
Option Strike Price Chooser (Excel)
Option Strike Price Chooser (Excel) Excel updates
Ask column now auto updates Delta column added Auto break-even target ATM
GR Stock Symbol Enter data into shaded fields only
$68.51 Current Stock Price
$74.60 Target Price
$5.00 Strike Price Increments
May 08 Expiration Month/Year
Strike AskBreak Even
Profit @ Target price
Potential Return
DeltaIntrinsic
ValueTime Value
5055 $15.30 $70.30 $4.30 28% 88% $13.51 $1.7960 $11.20 $71.20 $3.40 30% 79% $8.51 $2.6965 $7.40 $72.40 $2.20 30% 67% $3.51 $3.8970 $4.60 $74.60 $0.00 0% 51% ($1.49) $6.0975 $2.70 $77.70 ($3.10) -115% 35% ($6.49) $9.1980 $1.40 $81.40 ($6.80) -486% 22% ($11.49) $12.8985 $0.75 $85.75 ($11.15) -1487% 12% ($16.49) $17.2490 $0.35 $90.35 ($15.75) -4500% 6% ($21.49) $21.84
The profits represented are guranteed returns based on the target price being hit at expiration.
Time Value is not factored into these figures.
►
Chart
Clear
Import from TOS
(C lick here for ATM break-even
Option Strike Price Chooser (Excel)
Option Strike Price Chooser (Excel) Excel updates
Ask column now auto updates Delta column added Auto break-even target ATM Color options added
GR Stock Symbol Enter data into shaded fields only
$68.51 Current Stock Price
$74.60 Target Price
$5.00 Strike Price Increments
May 08 Expiration Month/Year
Strike AskBreak Even
Profit @ Target price
Potential Return
DeltaIntrinsic
ValueTime Value
5055 $15.30 $70.30 $4.30 28% 88% $13.51 $1.7960 $11.20 $71.20 $3.40 30% 79% $8.51 $2.6965 $7.40 $72.40 $2.20 30% 67% $3.51 $3.8970 $4.60 $74.60 $0.00 0% 51% ($1.49) $6.0975 $2.70 $77.70 ($3.10) -115% 35% ($6.49) $9.1980 $1.40 $81.40 ($6.80) -486% 22% ($11.49) $12.8985 $0.75 $85.75 ($11.15) -1487% 12% ($16.49) $17.2490 $0.35 $90.35 ($15.75) -4500% 6% ($21.49) $21.84
The profits represented are guranteed returns based on the target price being hit at expiration.
Time Value is not factored into these figures.
►
Chart
Clear
Import from TOS
(C lick here for ATM break-even
Option Strike Price Chooser (Excel)
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)SBUX Stock Symbol Enter data into shaded fields only
$20.53 Current Stock Price
$17.60 Target Price
$2.50 Strike Price Increments
Jan 09 Expiration Month/Year
Month Strike AskBreak Even
Profit @ Target price
Potential Return
DeltaIntrinsic
ValueTime Value
Jan 09 10Jan 09 12.5Jan 09 15 $0.85 $14.15 ($3.45) -406% -15% ($5.53) $6.38Jan 09 17.5 $1.45 $16.05 ($1.55) -107% -24% ($3.03) $4.48Jan 09 20 $2.40 $17.60 $0.00 0% -37% ($0.53) $2.93Jan 09 22.5 $3.70 $18.80 $1.20 32% -51% $1.97 $1.73Jan 09 25 $5.40 $19.60 $2.00 37% -65% $4.47 $0.93Jan 09 27.5Jan 09 30 $9.60 $20.40 $2.80 29% -92% $9.47 $0.13
The profits represented are guranteed returns based on the target price being hit.at expiration.
Time Value is not factored into these f igures.
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)SBUX Stock Symbol Enter data into shaded fields only
$20.53 Current Stock Price
$17.60 Target Price
$2.50 Strike Price Increments
Jan 09 Expiration Month/Year
Month Strike AskBreak Even
Profit @ Target price
Potential Return
DeltaIntrinsic
ValueTime Value
Jan 09 10Jan 09 12.5Jan 09 15 $0.85 $14.15 ($3.45) -406% -15% ($5.53) $6.38Jan 09 17.5 $1.45 $16.05 ($1.55) -107% -24% ($3.03) $4.48Jan 09 20 $2.40 $17.60 $0.00 0% -37% ($0.53) $2.93Jan 09 22.5 $3.70 $18.80 $1.20 32% -51% $1.97 $1.73Jan 09 25 $5.40 $19.60 $2.00 37% -65% $4.47 $0.93Jan 09 27.5Jan 09 30 $9.60 $20.40 $2.80 29% -92% $9.47 $0.13
The profits represented are guranteed returns based on the target price being hit.at expiration.
Time Value is not factored into these f igures.
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)
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)
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