The importance of the well-chosen strike

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Options Trading

It does matter, what strike we buy…

In the previous article, we saw what trading in the last days means, and how the sideways movement influences the purchased options.

In addition to the significant impact of time value, we also have to keep another aspect in mind and that is the chosen strike itself.

Indeed, it does matter, what strike we buy, especially in the last 30 days.

We know that the leverage of options increases exponentially in the last 30 days, as the time value decreases. The closer we are to maturity, the higher the leverage, the profit or loss will be, if there is any kind of movement.

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Greeks aspects

When choosing the 'right' strike, the Greeks aspects need to be taken into account as well. What is the value of Gamma?

Gamma refers to how quickly the ATM option moves to ITM or OTM directions. In other words, how fast will the change of the Delta be through the high Gamma? As we know, high Gamma shows the instability of Delta.

In the last days - if we want to earn money - we should choose a strike that has a high Gamma, as it will change rapidly. This is a double-edged sword of course, but this has already been discussed. Here are a few examples to illustrate the question. The following examples show the last 1-2 days before expiry.

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Examples

BAC -4.64% - Put Options

Interestingly, one of the strikes (18) has appreciated + 91%, while the 17 lost 87.5% of its value. It is a significant difference ...

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Examples

GE -4.23% - Put Options

This is an equally interesting example. As seen above, we have the same phenomenon, but with another paper.

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Examples

Here's an extreme example: ICE + 7.73% - Call

The price was 99 on opening, ie. the 100 Call was OTM. Due to the high rise, it became ITM fast and this can be seen on the % of profit as well.

It made + 1275% within a day!!!

Imagine, what could have happened, if you confidently play the 100 call in naked short on the day before ... :)

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Examples

AMZN + 26% - Call

Here you can see Amazon after the quick report, with next month maturity. Again, not bad percentages. The 135 Call made +8400 % !!!

If you decide to buy in the last few days, examine thoroughly which strike you buy!

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Feel free to ask me!

Email: gery@optionsrules.com

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