I’d like to thank Tiger for awarding the weekly top predictions for SPY once again. Looking forward to contribute towards the community to hunt as a pack with daily trade levels posted. All the best! 💪
What is The Strike Price?
Let’s explore further on how to pick the correct strike price as it is one of the two most important decisions you’ll make when trading options. The other is choosing the right expiry date.
The strike price is the price that you agree to either buy or sell an underlying asset for in an options contract. Before we explain the strike price in options trading further, you need to understand the concept of rights and obligations when buying or selling call or put options:
- When you buy a call option, you have the right to buy an underlying market at the strike price before a set expiry. For this right, you’ll pay a premium
- When you sell a call option, you have the obligation to sell an underlying market at the strike price before a set expiry. For taking on this obligation, you’ll receive a premium
- When you buy a put option, you have the right to sell an underlying market at the strike price before a set expiry. For this right, you’ll pay a premium
- When you sell a put option, you have the obligation to buy an underlying market at the strike price before a set expiry. For taking on this obligation, you’ll receive a premium
How Does The Strike Price Work?
When trading options, the underlying market price must move through the strike price to make it possible for that option to be executed – known as in the money. If this doesn’t happen, the option will expire worthless – known as out of the money.
Call options with higher strike prices are usually less expensive than those with lower strike prices because it’ll take a bigger price move in the underlying market for them to be at the money. This is the third possibility for an option’s current price, and at the money means that the option has an equal or incredibly similar chance of expiring either with or without a value.
But, when trading put options, this is reversed. So, put options with low strike prices will be more expensive than put options with higher strike prices.
What Does An Option Chain Look Like?
In the screengrab below – taken from Tiger trading platform – you can see the option chain for the SPDR S&P 500 ETF (SPY) for 24 April 2023. You’ll see that the price of options is affected by whether the strike price is currently closer or further away from the underlying market price.
SPY option chain
The price of call options rises as the underlying market increases in price, and a put option will increase in price as the underlying market falls. It does this because in both scenarios, the option will be approaching the strike price, meaning that the likelihood of the option expiring in the money is increasing.
How To Pick The Right Strike Price
1. Identify the market you want to trade
2. Decide on your options strategy
3. Consider your risk profile
4. Take the time to carry out analysis
5. Work out the value of your option and pick your strike price
7. Open an account to get familiar with the platform, strike price and trading strategies to paper trade for 2-3 months before using real money!
Decide your strike price according to the volatility in the market, and whether you think that the option will expire with an intrinsic value – which will happen when the underlying price moves past the strike price.
My option trade summary
Investors and traders with a low risk tolerance might choose a strike price that is close to or at the underlying market price, while those with a higher risk appetite might choose a strike price that is further away from the underlying market price.
Options with a strike that is further away from the underlying market price will often have a higher pay-out if the position turns profitable.
🚨 If you find the info useful, I'd appreciate if you could click on Like 👍, Comment 💬 & Repost 🔄 this article found at the bottom of your screen. Follow me for the latest news, trading ideas & strategies to ride the market daily with profits! 🤑
@CaptainTiger @MillionaireTiger @TigerStars @Daily_Discussion
Comments