← IntermediateLesson 2 · 3:21
Which strike should you choose?
Summary
You can choose a strike by its delta and say what you are trading: a higher delta costs more, reaches its break-even more often in the model and needs a smaller move. A lower delta costs less but needs a bigger, faster move, and the whole premium is what you can lose either way.
Key terms
- strike
- The price at which an option lets you buy (a call) or sell (a put) the stock.
- delta
- How much an option's price moves for a $1 move in the stock, and a rough guide to the chance it finishes in the money.
- break-even
- The stock price on the last day where you neither make nor lose money: strike plus premium for a call, strike minus premium for a put.
- premium
- What you pay for an option, which you don't get back, and the most you can lose when you buy one.
Check yourself
Answer each question to see why the right answer is right.
1. The 70 delta XYZ call costs $576 a contract and the 10 delta call costs $40. What is the cheaper strike really?
2. The 10 delta call has a $112 strike and costs $0.40 a share. Where must XYZ be on the last day for you to break even?
3. XYZ ends at $105 on the last day. Which of the five calls ($96, $100, $105, $108, $112) make money?
4. XYZ ends at $115. The 70 delta makes $1,324, a little over twice its cost, and the 10 delta makes $260, more than six times its cost. What does this show?
5. Which line describes a higher delta strike compared with a lower delta strike?
Finished the video and the quiz? .