choosing the right option strike price january 12 th, 2008 presented by: dan blanchard

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.

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.

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).

2. Determine the profit by subtracting the Break Even from the Target

• Profit = Target – Break Even

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

3. Determine the Potential Return by dividing the Ask into the Profit.

• Potential Return = Profit ÷ Ask

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

Example

Potential return

(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

3. Determine the Potential Return by dividing the Ask into the Profit.

• Potential Return = Profit ÷ Ask

• Once the potential profit is identified, the process of choosing can be further refined by use of the Delta.

• 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.

Questions

Excel Updates

Option Strike Price Chooser (Excel) Excel updates

Ask column now auto updates

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.

Import from TOS

(C lick here for ATM break-even

Ask column now auto updates Delta column added

GR Stock Symbol Enter data into shaded fields only

$74.60 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

Import from TOS

Option Strike Price Chooser (Excel)

Ask column now auto updates Delta column added Auto break-even target ATM

$74.60 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

Import from TOS

Ask column now auto updates Delta column added Auto break-even target ATM Color options added

$74.60 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

Import from TOS

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 Enter data into shaded fields only

$17.60 Target Price

Jan 09 Expiration Month/Year

Month Strike AskBreak Even

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.

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 Enter data into shaded fields only

$17.60 Target Price

Jan 09 Expiration Month/Year

Month Strike AskBreak Even

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.

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)

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.

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.

Questions&

Demonstration

choosing the right option strike price january 12 th, 2008 presented by: dan blanchard

right option strike

target price

option price relative

stock price

clickable slide

itm slide

target break

target profit

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