Papale on Strike Selection

Today I write from the dust and noise of a house under renovation.  We are doing some work in the kitchen and family room and I need to be around to accept delivery of some cabinets.  So as I write please excuse the dust and noise.

One of the topics that generates a lot of conversation among option traders is how we pick our strikes for a particular trade.  There are lots of reasons for why a particular strike may be selected in any given trade.  A directional or technical trader may choose strikes based on a support or resistance line.  For example he might place a short call just under a resistance point expecting the market to sell off when it reaches that price level.  Volatility traders might adjust their strike placement based on what the level of implied volatility is and how much vega they want to be long or short.  As we know, the option closest to the at the money strike generally has the greatest impact on the greeks.  Want to be long vega?  Buy the at the money at sell something farther away.  Remember though as markets move and new at the money strikes get established, vega and all greeks change.  There is no right or wrong when it comes to selection of strikes.  As in most trades it comes down to risk versus reward.  Know your expectation before placing the trade and then structure accordingly.  And don’t forget to manage risk.

(Steve will present more information on this topic this Monday at 1:00pm CST in the Mentor Webinar Series. . Go to http://www.optionvue.com for more information listed on the homepage.)

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