Saturday, July 16th, 2016

Should i buy the call/put options of which the strike price is same as market price or higher/lower?

Assuming i do not intend to exercise the option? Ny just want to take advantage of comercio.E options. g Apple Inc is $ 100 and hope to “get up.” As? I’m wise to buy the option “to purchase Apple Inc, the exercise price is $ 80? ? O is m? S wise to buy option? No purchase the exercise price is $ 120? And the strategy of extraordinary choice of sale? Thanks.

Comments

4 Responses to “Should i buy the call/put options of which the strike price is same as market price or higher/lower?”
  1. S says:

    It depends upon your prognosis of the price of AAPL just before expiration. The 120 call is 20% above AAPL’s stock price and the chances of being in the money is below 50% or the delta of the 120 is a rough estimate of the probability of expiring at the money. What are the chances of AAPL going up more than 20% in the timeframe based on the expiration of the call.

    In regards to the in the money call, you can buy the 80, 85, or 90 call. It depends upon your prognosis of AAPL price, your budget, and how much you want the call to move in relationship to AAPL’s price move, also known as delta. You would have to sell the in the money call before expiration otherwise the OCC will assign you if you are $0.01 in the money at expiration.

    In regards to the bullish put option strategies, you can sell cash secured OTM puts or OTM put verticals for a credit. Remember it is not really a credit since cash is held back beyond the credit received and your buying power has been reduced.

  2. happytony says:

    Apple is $100, u expect it rise. so u BUY.
    it depend on U how much it can rise (u expect).

  3. John W says:

    You should always assume that you will have to exercise the options or you risk having to sell it below it’s value due to a lack of liquidity especially if you hold it within 30 days of it’s expiration. Liquidity and extrinsic value evaporate very quickly in the last 30 days and in the week or two before the expiration, bids will be lower based on the assumption that the only reason you are selling is because you don’t have the capital to exercise the options especially with a high priced stock like Apple.

    The closer the strike price is to the market price when you buy, the more extrinsic value will be factored into the premium that you pay as there is maximum uncertainty as to whether or not the option will be in the money. Keep in mind that the extrinsic value decays as the expiration date approaches. However if the strike price of a call option is higher than the market price (the option is out of the money), the option will be less likely to be in the money upon expiration and the price will be lower because of that. If the strike price is below the market price (the option is in the money) then it’s more likely that the option will be in the money upon expiration and the more in the money it is, the more the premium will approach the price of the stock itself.

    If you intend to buy call options in lieu of the shares, then you want to buy options that are as in the money as you can afford because then you will be paying mostly for the intrinsic value and not for the extrinsic value which disappears with time.

    With put options, they’re in the money when the market price is below the strike price and out of the money when the market price is above the strike price. Again if you are buying put options in lieu of shorting a stock then you should buy as in the money as possible so that you’re paying or intrinsic value not extrinsic value.

    However, using options as a direct substitute for shares is not necessarily the best use of an option. Learn how to use options to reduce risk not to leverage risk.

  4. James says:

    There is no “wise” or “stupid” option to buy. All options serve a purpose and thats why there’s so many to choose from.

    Generally, you need to understand first what “Options Moneyness” means.

    For call options, the lower the strike price is below market price, the more in the money it is, the more expensive it becomes, the lower the leverage and the lower the risk of complete loss. The higher the strike price is above market price, the more out of the money it is, the cheaper it becomes, the higher the leverage and the higher the risk of complete loss.

    As such, which strike price to choose is really up to your own trading style and risk appetite. If you are the high roller type who don’t mind losing everything for a potentially huge gain, by all means go for the cheaper out of the money options ($120). Otherwise, the in the money options ($80) would be less risky and less rewarding on the same amount of money traded.

    I would suggest you read the free resource below and thoroughly understand this critical issue of moneyness before you think of trading options for real.

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