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Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.
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Transcript of Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.
![Page 1: Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.](https://reader035.fdocuments.in/reader035/viewer/2022062515/56649f4f5503460f94c70a9a/html5/thumbnails/1.jpg)
Choosing the Right Option Strike Price
January 12th, 2008
Presented by: Dan Blanchard
![Page 2: Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.](https://reader035.fdocuments.in/reader035/viewer/2022062515/56649f4f5503460f94c70a9a/html5/thumbnails/2.jpg)
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.
![Page 3: Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.](https://reader035.fdocuments.in/reader035/viewer/2022062515/56649f4f5503460f94c70a9a/html5/thumbnails/3.jpg)
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.
![Page 4: Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.](https://reader035.fdocuments.in/reader035/viewer/2022062515/56649f4f5503460f94c70a9a/html5/thumbnails/4.jpg)
Example
BA is trading at $98.65 and is expected to go to $103 before the July expiration.
![Page 5: Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.](https://reader035.fdocuments.in/reader035/viewer/2022062515/56649f4f5503460f94c70a9a/html5/thumbnails/5.jpg)
Option Strike Price Chooser
1. Determine the Break Even price by adding the Strike and the Ask
• Break Even = Strike + Ask
![Page 6: Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.](https://reader035.fdocuments.in/reader035/viewer/2022062515/56649f4f5503460f94c70a9a/html5/thumbnails/6.jpg)
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).
![Page 7: Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.](https://reader035.fdocuments.in/reader035/viewer/2022062515/56649f4f5503460f94c70a9a/html5/thumbnails/7.jpg)
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
![Page 8: Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.](https://reader035.fdocuments.in/reader035/viewer/2022062515/56649f4f5503460f94c70a9a/html5/thumbnails/8.jpg)
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
![Page 9: Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.](https://reader035.fdocuments.in/reader035/viewer/2022062515/56649f4f5503460f94c70a9a/html5/thumbnails/9.jpg)
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
![Page 10: Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.](https://reader035.fdocuments.in/reader035/viewer/2022062515/56649f4f5503460f94c70a9a/html5/thumbnails/10.jpg)
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
![Page 11: Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.](https://reader035.fdocuments.in/reader035/viewer/2022062515/56649f4f5503460f94c70a9a/html5/thumbnails/11.jpg)
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
![Page 12: Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.](https://reader035.fdocuments.in/reader035/viewer/2022062515/56649f4f5503460f94c70a9a/html5/thumbnails/12.jpg)
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
![Page 13: Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.](https://reader035.fdocuments.in/reader035/viewer/2022062515/56649f4f5503460f94c70a9a/html5/thumbnails/13.jpg)
Option Strike Price Chooser
• Once the potential profit is identified, the process of choosing can be further refined by use of the Delta.
![Page 14: Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.](https://reader035.fdocuments.in/reader035/viewer/2022062515/56649f4f5503460f94c70a9a/html5/thumbnails/14.jpg)
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.
![Page 15: Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.](https://reader035.fdocuments.in/reader035/viewer/2022062515/56649f4f5503460f94c70a9a/html5/thumbnails/15.jpg)
Option Strike Price Chooser
Questions
![Page 16: Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.](https://reader035.fdocuments.in/reader035/viewer/2022062515/56649f4f5503460f94c70a9a/html5/thumbnails/16.jpg)
Option Strike Price Chooser
Excel Updates
![Page 17: Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.](https://reader035.fdocuments.in/reader035/viewer/2022062515/56649f4f5503460f94c70a9a/html5/thumbnails/17.jpg)
Option Strike Price Chooser (Excel) Excel updates
Ask column now auto updates
![Page 18: Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.](https://reader035.fdocuments.in/reader035/viewer/2022062515/56649f4f5503460f94c70a9a/html5/thumbnails/18.jpg)
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
![Page 19: Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.](https://reader035.fdocuments.in/reader035/viewer/2022062515/56649f4f5503460f94c70a9a/html5/thumbnails/19.jpg)
Option Strike Price Chooser (Excel) Excel updates
Ask column now auto updates Delta column added
![Page 20: Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.](https://reader035.fdocuments.in/reader035/viewer/2022062515/56649f4f5503460f94c70a9a/html5/thumbnails/20.jpg)
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)
![Page 21: Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.](https://reader035.fdocuments.in/reader035/viewer/2022062515/56649f4f5503460f94c70a9a/html5/thumbnails/21.jpg)
Option Strike Price Chooser (Excel) Excel updates
Ask column now auto updates Delta column added Auto break-even target ATM
![Page 22: Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.](https://reader035.fdocuments.in/reader035/viewer/2022062515/56649f4f5503460f94c70a9a/html5/thumbnails/22.jpg)
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)
![Page 23: Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.](https://reader035.fdocuments.in/reader035/viewer/2022062515/56649f4f5503460f94c70a9a/html5/thumbnails/23.jpg)
Option Strike Price Chooser (Excel) Excel updates
Ask column now auto updates Delta column added Auto break-even target ATM Color options added
![Page 24: Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.](https://reader035.fdocuments.in/reader035/viewer/2022062515/56649f4f5503460f94c70a9a/html5/thumbnails/24.jpg)
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)
![Page 25: Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.](https://reader035.fdocuments.in/reader035/viewer/2022062515/56649f4f5503460f94c70a9a/html5/thumbnails/25.jpg)
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)
![Page 26: Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.](https://reader035.fdocuments.in/reader035/viewer/2022062515/56649f4f5503460f94c70a9a/html5/thumbnails/26.jpg)
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.
![Page 27: Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.](https://reader035.fdocuments.in/reader035/viewer/2022062515/56649f4f5503460f94c70a9a/html5/thumbnails/27.jpg)
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
![Page 28: Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.](https://reader035.fdocuments.in/reader035/viewer/2022062515/56649f4f5503460f94c70a9a/html5/thumbnails/28.jpg)
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.
![Page 29: Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.](https://reader035.fdocuments.in/reader035/viewer/2022062515/56649f4f5503460f94c70a9a/html5/thumbnails/29.jpg)
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
![Page 30: Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.](https://reader035.fdocuments.in/reader035/viewer/2022062515/56649f4f5503460f94c70a9a/html5/thumbnails/30.jpg)
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
![Page 31: Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.](https://reader035.fdocuments.in/reader035/viewer/2022062515/56649f4f5503460f94c70a9a/html5/thumbnails/31.jpg)
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.
![Page 32: Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.](https://reader035.fdocuments.in/reader035/viewer/2022062515/56649f4f5503460f94c70a9a/html5/thumbnails/32.jpg)
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:
![Page 33: Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.](https://reader035.fdocuments.in/reader035/viewer/2022062515/56649f4f5503460f94c70a9a/html5/thumbnails/33.jpg)
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)
![Page 34: Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.](https://reader035.fdocuments.in/reader035/viewer/2022062515/56649f4f5503460f94c70a9a/html5/thumbnails/34.jpg)
Option Strike Price Chooser (Excel)
![Page 35: Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.](https://reader035.fdocuments.in/reader035/viewer/2022062515/56649f4f5503460f94c70a9a/html5/thumbnails/35.jpg)
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.
![Page 36: Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.](https://reader035.fdocuments.in/reader035/viewer/2022062515/56649f4f5503460f94c70a9a/html5/thumbnails/36.jpg)
Option Strike Price Chooser (Excel)
![Page 37: Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.](https://reader035.fdocuments.in/reader035/viewer/2022062515/56649f4f5503460f94c70a9a/html5/thumbnails/37.jpg)
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.
![Page 38: Choosing the Right Option Strike Price January 12 th, 2008 Presented by: Dan Blanchard.](https://reader035.fdocuments.in/reader035/viewer/2022062515/56649f4f5503460f94c70a9a/html5/thumbnails/38.jpg)
Option Strike Price Chooser (Excel)
Questions&
Demonstration