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Mike A

How to Pick the Right Strike Price?

By Mike A, in Beginners Forum

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Mike A    10

Mike A
Posted

Hi all,

 

Very, very new to options trading, so I want to take baby steps. I want to start with buying a call option as my first trade.

 

One thing I am not completely sure of is how to pick the right strike price. I want to pick an in the money strike price, but which one? There are so many to choose from. Here is an example of what I want to do:

 

 

Buy call for AAPL Jul 13 @ $355 strike price for the cost of $108.65 per contract.

I want to buy just 1 contract, which would cost me $10,865.00 + commission.

 

If I understand this correctly, my break even price is strike price + the premium I paid. Which would be 355 + 108.65 = $463.65. Currently AAPL is at 460.16, so I'm not too far off the break even point. I read a little bit about the greeks so I understand that at this strike price, the delta is not quite 1 to 1 but at .89.

 

I want to limit my risk to around $1500. So after I buy I would place a sell to close stop limit order @ $93.65.

 

I also want to cap my possible gain so I can get out as fast as I can so I can keep more of the time premium. I would place a sell to close limit order @ $123.65.

 

I also understand that it's possible that the price will never get to my floor or ceiling limits and the closer I get to the expiration date, the time premium decreases. So I have to make decisions about taking profits for less than I expect or taking losses for less than the max I was willing to lose.

 

The question is, am I picking the right strike price? I could choose a strike price that is closer to out of the money, but my break even point would be higher.

 

For example @ $450 strike price it would cost me $36.75 per contract, but my break even point would be 450 + 36.75 = $486.75.

 

I don't mind putting up more money in order to get a lower break even point. In either case, I would not want to lose more than 1500 in a worst case scenario.

 

Is there a benefit to picking a strike price that is closer to at the money if you have to funds to pay the premium?

 

Since this would be my very first trade, any comments or suggestions would be welcomed.

 

Thanks in advance!

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Limitless420    10

Limitless420
Posted

Use call (bull) spreads that way you still get exposure to the stock while limiting your risk.

 

This means buying an in-the-money strike and selling an higher strike call that will lower the cost of the trade and make the break even closer to meaning you see profits sooner. The only down fall is you limit your gains at the higher strike.

 

:confused:

 

 

[url=http://www.traderslaboratory.com/forums/options-strategies/13000-bear-call-spread.html

 

Bull Spread Definition | Investopedia

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