How do I know which strike price I have to buy among a hundred?
Updated: Oct 6, 2021
The strike price of an option is the price at which a person has the right to buy or sell the stock.
Sometimes also known as the exercise price. A strike price is extremely important to maximize your profit and minimize your loss. Picking the wrong one may result in losses even you are in the right direction of the trade.
While Picking Strike Price consider 3 things.
Before talking about them let consider the scenario in which you want to make an options trade. First of all, choose the option strategy. e.g. buying put or writing CE.
The first and most important criteria to choose strike price will be Risk tolerance.
Risk Reward Payoff (in simple words amount you might lose from the capital if the trade is not in your favour and Reward you might get if the trade will be in the direction you have predicted).
Time Period it might take possibly based on time frame analysis (Might be difficult to predict but one guess nearby that).
ITM option (In the money ):- It has the higher delta. If the price increase by a given amount it will increase more compared to ATM and OTM. If price decreases due to higher delta option premium too will decrease more compared to ATM and OTM (talking about the call options).
But it is less risky compared to ATM and OTM because it has a more initial value. Might be the best option for the intraday.
OTM option (Out of the money):- It has the lowest delta. Its momentum always depends on expiration days and momentum. If higher momentum it can turn out multi-bagger and If momentum is low its premium will decrease even in the same direction. OTM is highly risky and Far OTM most of the time expire at 0.
ATM option (At the money):- It is very closed to strike price and its volatility is between ITM and OTM it is more risker than ITM and Less compared to OTM. Recommended buying when momentum is avg and want to hold for multiple days.
Things to remember:-
Don't jump on buying without a backup plan in case of a sudden change in sentiments or news can change the direction and can erode most of the value and you might face a loss.
Evaluate everything Will it has given more profit in buying option or selling option? Will momentum in near future will be more or less? based on this take decision on choosing option strike price.
Check beta and delta before going for the trade and avoid writing ITM and ATM options when momentum is high.
Avoid buying in low implied volatility and avoid selling in high implied volatility. It can be very risky.
E.g. If you are trading IDEA being high beta you should think of buying the option if the price is at 8 and you think it might go 12 in this month (till expiry) you can choose OTM options.
If you think this can go to 9 till expiry and it might go down towards 6 go for ATM options.
If you think this can go to 9 and it will defiantly not go below 8 should go for ITM options.
It will work the same in all stocks use this logic while taking any trade.