Transcript Choosing the Right Option Strike Price

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
Break Even - $100.80
Target - $103
Step 2. Profit is determined by subtracting the Break even from the Target.
(Target – Break Even = Profit -or- $103.00 - $100.80 = $2.20)
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
Profit - $2.20
Step 3. Potential return is determined by dividing the Ask into the Profit.
(Profit ÷ Ask = Potential return -or- $2.20 ÷ $5.80 = 37.9%)
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
$68.51
$74.60
$5.00
May 08
Strike
50
55
60
65
70
75
80
85
90
Stock Symbol
Current Stock Price
Target Price ( C lick her e f o r
Strike Price Increments
Expiration Month/Year
Ask
$15.30
$11.20
$7.40
$4.60
$2.70
$1.40
$0.75
$0.35
Break
Even
$70.30
$71.20
$72.40
$74.60
$77.70
$81.40
$85.75
$90.35
Enter data into shaded fields only
A T M b r eak- even
Chart Import from TOS
Profit @
Target price
Potential
Return
Delta
$4.30
$3.40
$2.20
$0.00
($3.10)
($6.80)
($11.15)
($15.75)
28%
30%
30%
0%
-115%
-486%
-1487%
-4500%
88%
79%
67%
51%
35%
22%
12%
6%
Intrinsic
Value
$13.51
$8.51
$3.51
($1.49)
($6.49)
($11.49)
($16.49)
($21.49)
The profits represented are guranteed returns based on the target price being hit at expiration.
Tim e
Value
$1.79
$2.69
$3.89
$6.09
$9.19
$12.89
$17.24
$21.84
►
Time Value is not factored into these figures.
Clear
Option Strike Price Chooser (Excel)

Excel updates


Ask column now auto updates
Delta column added
Option Strike Price Chooser (Excel)
GR
$68.51
$74.60
$5.00
May 08
Strike
50
55
60
65
70
75
80
85
90
Stock Symbol
Current Stock Price
Target Price ( C lick her e f o r
Strike Price Increments
Expiration Month/Year
Ask
$15.30
$11.20
$7.40
$4.60
$2.70
$1.40
$0.75
$0.35
Break
Even
$70.30
$71.20
$72.40
$74.60
$77.70
$81.40
$85.75
$90.35
Enter data into shaded fields only
A T M b r eak- even
Chart Import from TOS
Profit @
Target price
Potential
Return
Delta
$4.30
$3.40
$2.20
$0.00
($3.10)
($6.80)
($11.15)
($15.75)
28%
30%
30%
0%
-115%
-486%
-1487%
-4500%
88%
79%
67%
51%
35%
22%
12%
6%
Intrinsic
Value
$13.51
$8.51
$3.51
($1.49)
($6.49)
($11.49)
($16.49)
($21.49)
The profits represented are guranteed returns based on the target price being hit at expiration.
Tim e
Value
$1.79
$2.69
$3.89
$6.09
$9.19
$12.89
$17.24
$21.84
►
Time Value is not factored into these figures.
Clear
Option Strike Price Chooser (Excel)

Excel updates



Ask column now auto updates
Delta column added
Auto break-even target ATM
Option Strike Price Chooser (Excel)
GR
$68.51
$74.60
$5.00
May 08
Strike
50
55
60
65
70
75
80
85
90
Stock Symbol
Current Stock Price
Target Price ( C lick her e f o r
Strike Price Increments
Expiration Month/Year
Ask
$15.30
$11.20
$7.40
$4.60
$2.70
$1.40
$0.75
$0.35
Break
Even
$70.30
$71.20
$72.40
$74.60
$77.70
$81.40
$85.75
$90.35
Enter data into shaded fields only
A T M b r eak- even
Chart Import from TOS
Profit @
Target price
Potential
Return
Delta
$4.30
$3.40
$2.20
$0.00
($3.10)
($6.80)
($11.15)
($15.75)
28%
30%
30%
0%
-115%
-486%
-1487%
-4500%
88%
79%
67%
51%
35%
22%
12%
6%
Intrinsic
Value
$13.51
$8.51
$3.51
($1.49)
($6.49)
($11.49)
($16.49)
($21.49)
The profits represented are guranteed returns based on the target price being hit at expiration.
Tim e
Value
$1.79
$2.69
$3.89
$6.09
$9.19
$12.89
$17.24
$21.84
►
Time Value is not factored into these figures.
Clear
Option Strike Price Chooser (Excel)

Excel updates




Ask column now auto updates
Delta column added
Auto break-even target ATM
Color options added
Option Strike Price Chooser (Excel)
GR
$68.51
$74.60
$5.00
May 08
Strike
50
55
60
65
70
75
80
85
90
Stock Symbol
Current Stock Price
Target Price ( C lick her e f o r
Strike Price Increments
Expiration Month/Year
Ask
$15.30
$11.20
$7.40
$4.60
$2.70
$1.40
$0.75
$0.35
Break
Even
$70.30
$71.20
$72.40
$74.60
$77.70
$81.40
$85.75
$90.35
Enter data into shaded fields only
A T M b r eak- even
Chart Import from TOS
Profit @
Target price
Potential
Return
Delta
$4.30
$3.40
$2.20
$0.00
($3.10)
($6.80)
($11.15)
($15.75)
28%
30%
30%
0%
-115%
-486%
-1487%
-4500%
88%
79%
67%
51%
35%
22%
12%
6%
Intrinsic
Value
$13.51
$8.51
$3.51
($1.49)
($6.49)
($11.49)
($16.49)
($21.49)
The profits represented are guranteed returns based on the target price being hit at expiration.
Tim e
Value
$1.79
$2.69
$3.89
$6.09
$9.19
$12.89
$17.24
$21.84
►
Time Value is not factored into these figures.
Clear
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
$20.53 Current Stock Price
$17.60 Target Price
$2.50 Strike Price Increments
Jan 09 Expiration Month/Year
Month
Strike
Jan 09
Jan 09
Jan 09
Jan 09
Jan 09
Jan 09
Jan 09
Jan 09
Jan 09
10
12.5
15
17.5
20
22.5
25
27.5
30
Ask
Enter data into shaded fields only
Break
Even
Profit @
Target
price
Potential
Return
Delta
Intrinsic
Value
Tim e
Value
$0.85
$1.45
$2.40
$3.70
$5.40
$14.15
$16.05
$17.60
$18.80
$19.60
($3.45)
($1.55)
$0.00
$1.20
$2.00
-406%
-107%
0%
32%
37%
-15%
-24%
-37%
-51%
-65%
($5.53)
($3.03)
($0.53)
$1.97
$4.47
$6.38
$4.48
$2.93
$1.73
$0.93
$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 figures.
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
$20.53 Current Stock Price
$17.60 Target Price
$2.50 Strike Price Increments
Jan 09 Expiration Month/Year
Month
Strike
Jan 09
Jan 09
Jan 09
Jan 09
Jan 09
Jan 09
Jan 09
Jan 09
Jan 09
10
12.5
15
17.5
20
22.5
25
27.5
30
Ask
Enter data into shaded fields only
Break
Even
Profit @
Target
price
Potential
Return
Delta
Intrinsic
Value
Tim e
Value
$0.85
$1.45
$2.40
$3.70
$5.40
$14.15
$16.05
$17.60
$18.80
$19.60
($3.45)
($1.55)
$0.00
$1.20
$2.00
-406%
-107%
0%
32%
37%
-15%
-24%
-37%
-51%
-65%
($5.53)
($3.03)
($0.53)
$1.97
$4.47
$6.38
$4.48
$2.93
$1.73
$0.93
$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 figures.
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