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Market Measures

Buying Options | Duration and Strike Comparison

Dec 15, 2015

We believe is selling premium but sometimes we just want to go long or short a market and that's when buying a put or a call can be a better idea than the outright stock and this segment can serve as a guide as to which strike and expiration combination you should choose. There is information here that can help all traders.

We believe in selling premium because Implied volatility typically overstates actual volatility. There are times though when we just want a long or short position and using a put or call is our best choice. The question then is which strike and expiration combination is the best one to use.

A graph of the SPX (S&P 500) strike price versus implied volatility (IV) was displayed. The graph showed the “volatility smile”, showing how puts are typically priced higher than the calls. A second graph of the SPX call option price versus the strike price was displayed. The graph included both the intrinsic value and extrinsic value of the call options. We want to buy options that have very little extrinsic value.

A graph of theta decay on long options was displayed. The graph showed that theta decay begins to accelerate around 45 days to expiration (DTE) which is why we avoid shorter term options. A table comparing a long stock position to a long JAN17 $90 call position on XYZ stock trading at $100 was displayed. The table included the cash outlay, P/L with the stock at $120 and the P/L percentage. It helped to explain why we would want to use an option rather than the stock.

A second table comparing a long stock position to a long JAN17 $90 call position on XYZ stock starting at $100 but falling to $80 in 6 months was displayed. The table included the buying power reduction (BPR), notional loss and percentage loss on both.

Tom and Tony also used the thinkorswim platform to provide an example using AAPL. They showed where you find the delta and DTE and other important data.

Watch this segment of “Market Measures” with Tom Sosnoff and Tony Battista for the takeaways about which strike and expiration combination you should use when you decide to buy options.

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