When it comes to trading options, choosing the right strike price can be crucial to your success. A strike price is the price at which the option can be exercised, and it is one of the most important factors that determines the profitability of an options trade. In this article, we will discuss how to pick a strike when day trading or swing trading options.
1. Determine Your Trading Strategy
The first step to picking a strike price is to determine your trading strategy. Are you day trading or swing trading? If you're day trading, you'll want to choose a strike price that is closer to the current market price of the underlying asset. This will give you a better chance of profiting from short-term price movements. If you're swing trading, you may want to choose a strike price that is further away from the current market price to allow for more significant price movements. If you don’t have a clear strategy in mind, get that sorted before thinking about what strike selection you need.
2. Consider the implied volatility
Implied volatility is a measure of the market's expectation of how much the price of the underlying asset will move over the life of the option. Higher implied volatility means that the market expects the asset to move more, and vice versa. When picking a strike price, it's important to consider the implied volatility. If the implied volatility is high, your profit potential will be limited. When holding overnight (swing trading), beware of volatility crush!
3. Look at the Greeks
The Greeks are a set of risk measures that help traders understand how changes in the price of the underlying asset, volatility, time decay, and interest rates affect the price of an option. The most important Greeks to consider when picking a strike price are delta and gamma. Delta measures the sensitivity of an option's price to changes in the price of the underlying asset, while gamma measures the sensitivity of delta to changes in the price of the underlying asset. If you are a swing trader, you’ll also want to look at theta, which is the time decay of an option. Options greeks can be confusing - If you want to simplify your process for option selection, join the Trader’s Thinktank and sign up for the Options Mastery Course. In the Thinktank we provide the best option to be trading with the trade idea, and in the Options Mastery Course we teach you how to systematize your option selection so you don’t have to think about it.
4. Consider the expiration date
The expiration date is the date on which the option expires. When picking a strike price, it's important to consider the expiration date. If you're day trading, you'll want to choose a strike price with an expiration date that is relatively close to the current date. This is usually going to be the weekly option, which is the nearest expiration. If you're swing trading, you may want to choose a strike price with a longer expiration date to allow for more significant price movements and for the higher timeframe charts to develop.
5. Use the Options Mastery Course as a resource
If you're new to options trading or want to learn more about it, the Options Mastery Course is a great resource. It covers everything from the basics of options trading to more advanced intraday trading strategies. The course is beginner friendly and will tell you everything you need to know about options and how to use them - Including specific strategies and trading systems to extract profit from the market.
In conclusion, picking the right strike price is an essential part of options trading. By following these tips, you can increase your chances of success and minimize your risks. And if you're looking to learn more about options trading, be sure to check out the Options Mastery Course.