Related Posts
Watch enthusiasts - Which model is this?
Does anyone know anything about bekaert pune ?
Thoughts on Virtue?
Additional Posts in Option Traders & Investing
Apple shares? Yes or ni
9/15 Thread (BC):
1/26 Thread (General):
$MSFT is killing it lately 🙄
9/22 Thread (General):
New to Fishbowl?
unlock all discussions on Fishbowl.
KPMG there are option calculators out there which will let you enter a given symbol, strike, and date and see what expected payout is if a certain price is hit by a certain date in a heat map.
Optionsprofitcalculator.com is the one I use.
This can give you a good sense of what to do. Keep in mind though that it’s not a guarantee as some options move differently based on the volatility.
Rule of thumb is if you’re looking to maximize profit, higher strikes do that but are riskier for obvious reasons.
Mentor
STA, I was not trying to knock the example, only point out option pricing calculators are valuable because derivatives math is non-trivial.
Subject Expert
This question implies that you should spend some time understanding options pricing before buying them. If you don’t, then you are just gambling.
The answer to your question is... it depends on exactly how the stock gets from 10 to 15 across the life of the option. Experienced traders rarely hold options to expiry, especially OTM options. If you are doing this trade to see the price to 15 through expiry, I would go ATM 10C and enjoy a higher delta gains on the price movement rather than gamble an OTM play.
If you are going to buy a call and you truly believe the stock is going to increase for reasons other than wildly speculating, then buy the call option at the strike that is closest to ATM. This way you won’t be paying for too much extra theta (extrinsic value).
I normally sell OTM options, but on the rare occasion that I buy a call, it’s ATM. Realize that if you buy the $14 strike and it goes to $15 like you want, you wouldn’t really make money. The option itself may cost $2 or something, in which case your break even price would be $16 and you’d actually lose money, despite predicting correctly. Maybe the $10 strike costs $4 or so, the if the underlying stock goes to $15, you’d make $1. So more payment up front, but better payoff and chance of success. It just depends how much you truly believe it will go up. OTM calls can be fun as cheap gambles, so it’s still an option if you want to speculate without a large down payment, but just make sure you know you’re true break even price for the underlying stock.
Strike price/asset price isn’t the only variable. Time is a huge one. Look at OTM options closer to today if you want a cheaper premium.
$14 strike would net you the most gains.
Enthusiast
OP - closer to the money options are always going to be safer. It just depends how much capital you want to expend. In terms of a % return, its hard to say but generally if you play further OTM you can get a better return % (obviously comes with more risk). Like cheap flyers that are $10 can instantly double to $20 on a big move.
It’s a trade off between probability of profits and potential return. The choice depends on your trading style and risk tolerance.
Deep ITM calls will give you the best probability of profit and you can still get a solid return. An $8 strike with a $1.20 would still give you a 3x gain.
For the same capital $14 usually gives higher return unless something funky going on.
Eg
$12 strike is $1
$14 strike is $0.2
For $15 sale
$12 strike - you get 3x return
$14 strike - you get 5x return
Mentor
Option pricing is a derivative, and is priced based on the supply and demand of the underlying, not supply and demand of the option. The spread is based on supply and demand of the option.
The short answer to your question is that it depends. It might seem like a beginner question, and it is in that its something you can easily determine at any time with simple arithmetic, but hard in that its tough to give a generalized answer to a hypothetical situation. You need to provide the premiums of the options.
So an option $1 further out isn’t going to be $1 cheaper. The $14 isn’t going to be $2 cheaper than the $12, it’ll be less than $2 cheaper. Therefore if the underlying at expiry is $15, the $12 will pay out $2 more than the $14 while being less than $2 more expensive. So $12 will payout more.
But to maximize returns you care about proportions. And to calculate the proportions, you need to know the price of the options. We can say with some confidence the absolute difference in premiums will be less than $2, but we don’t know the premiums themselves. If the $12 costs $2.5 and the $14 costs $2, then obviously the $12 makes money while the $14 loses. On the other hand if the $12 costs $2 and the $14 costs .25 then the return on the $14 is better. So it depends.
As I originally stated, if you want to know the answer in a specific situation you just take the cost of the options and divide by your expected profit. More generally, there’s not a surefire answer.
Enthusiast
Also consider recent areas of resistance and what catalysts you see ahead will drive price movement above those levels if they are below $15. A 50% move is rather large...
Why buy calls instead of the stock? Less capital investment?
Mentor
Much less capital. You can get the same appreciation with less capital but with time risk and cost of capital risk.
$14