How To Choose The Best Strike Price For Selling Options” is an informative video by Options with Davis that explores the various perspectives on selecting the best strike price for selling options. The video provides timestamps for different sections, including the start, key elements to consider when choosing strikes, and the fastest way to identify the best strikes on a chart. It also discusses the importance of finding a balance between a high probability of profit and sufficient premium to justify occasional losses. The video covers strategies such as covered calls, iron condors, and the wheel strategy, and recommends using the 16 Delta strike price on both puts and calls for a good balance of win rate and premium.
In this captivating video, “How To Choose The Best Strike Price For Selling Options” by Options with Davis, you will learn valuable insights on selecting the optimal strike price for selling options. The video delves into different opinions regarding strike price selection, highlighting the contrasting ideas of choosing the highest premium versus the highest win rate. It emphasizes the subjectivity of the best strike price, highlighting that individual preferences and market movements play a significant role. The video also explains the importance of understanding Delta, the probability of expiring cone, and the expected move when determining strike prices. With timestamps and insights on various options trading strategies, this video is a valuable resource for both beginners and experienced traders alike.
Choosing the Best Strike Price
When it comes to choosing the best strike price for selling options, there are differing opinions among traders. Some believe that the best strike price is the one with the highest premium, while others argue that it is the one with the highest win rate. Ultimately, the best strike price will depend on your individual preferences and risk tolerance.
Determining the best strike price can be challenging because it can be subjective and may vary from trader to trader. What one person considers the best strike price based on premium, another trader may prefer a strike price with a higher win rate. It is important to understand that there is a trade-off between premium and win rate. A strike price with high premium may have a lower win rate, and vice versa.
It is also important to note that the best strike price can only be determined after the market has moved. Predicting the future movement of the market is impossible, so it is essential to wait for the market to provide the necessary information before making a decision on the best strike price.
Considering Premium and Win Rate
To strike a balance between premium and win rate, it is crucial to consider both factors when choosing a strike price. The strike with the highest premium may not always have the highest win rate, and the strike with the highest win rate may not offer sufficient premium to justify occasional losses.
Finding the ideal strike price requires a careful assessment of the probability of profit and the potential premium. It is important to aim for a strike price that offers a reasonable probability of profit while still providing enough premium to cover potential losses.
Understanding Delta
Delta is a useful tool for determining the probability of a strike price being in the money. It measures the rate of change in the option pricing based on a one-dollar move of the underlying stock. Delta is also a quick way to determine the win rate of a strike price.
For example, a strike price with a 20 Delta would have approximately a 20% chance of being in the money, which translates to an 80% win rate. On the other hand, a strike price with a 10 Delta would have approximately a 10% chance of being in the money, resulting in a 90% win rate.
By considering Delta, traders can strike a balance between premium and win rate. Higher Delta strike prices offer higher premiums but slightly lower win rates, while lower Delta strike prices offer lower premiums but higher win rates.
Estimating Price Range with Expected Move
The expected move is a concept that helps estimate the potential range of a stock’s price movement. It is based on the stock’s current level of implied volatility and predicts the amount that the stock is expected to move up or down from its current price within a certain time frame.
One way to estimate the expected move is by using the 16 Delta strike price on both the put and call options. By selecting this strike price, you can have a reasonable expectation that the price will not exceed this level by expiration.
Choosing strike prices around the expected move provides traders with a decent chance of winning most of the time. It allows them to take advantage of the predicted price range and make informed decisions about strike prices.
Importance of Sufficient Premium
When selecting strike prices, it is crucial to ensure that there is sufficient premium to cushion outlier losses. Strike prices with Deltas below 16 may not have enough premium to cover potential losses, especially during unexpected market moves.
While it may be tempting to choose strike prices with high win rates, it is important to consider the premium attached to those prices. A high win rate may not be sufficient if the premium does not justify the occasional losses. A good balance between premium and win rate is the key to success in options trading.
Using Thinkorswim’s Probability of Expiring Cone
Thinkorswim’s Probability of Expiring Cone is a helpful indicator traders can use to quickly identify the 16 Delta strike price on a chart. This indicator visually displays the probability of an option expiring within a certain range.
By using the Probability of Expiring Cone, traders can streamline the process of choosing the ideal strike price. This tool saves time and effort by providing a clear visual representation of the strike price with a high probability of profit.
The Probability of Expiring Cone can be applied to various options trading strategies. Whether you are selling covered calls, using the wheel strategy, or implementing credit spreads, this indicator can assist in making informed decisions about strike prices.
Choosing Strike Prices for Specific Strategies
Different options trading strategies require specific strike price selection. Here’s how strike prices can be chosen for some common strategies:
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Selling Covered Calls with Target Expiration and Strike Price: When selling covered calls, it is important to select a strike price slightly above the current market price to give yourself a cushion in case of price fluctuations. Choosing the expiration date depends on your desired timeframe and goals.
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Wheel Strategy Based on Support Areas or Weekly Timeframe: For the wheel strategy, strike prices can be chosen based on support areas or a weekly timeframe. The goal is to select strike prices that offer a good balance between premium and win rate while taking advantage of opportunities in the market.
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Credit Spreads and the Probability of Expiring Cone: Credit spreads can benefit from strike prices that align with the high probability of expiring cone. By choosing strike prices within this range, traders can set themselves up for a higher chance of success.
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Applying the Cone to the Iron Condor Strategy: The iron condor strategy involves selecting strike prices that create a wide profit zone. By utilizing the Probability of Expiring Cone, traders can identify the strike prices that maximize their potential profit range.
Plotting the Expected Move on a Chart
Traders can utilize the Probability of Expiring Cone indicator to plot the expected move on a chart. By visualizing the expected move range, traders can make informed decisions about strike prices and adjust their strategies accordingly. This visual representation helps to assess potential risks and rewards.
When plotting the expected move on a chart, traders can gain valuable insights into the potential price range and make informed choices about strike prices based on the indicator.
Closing Remarks
Choosing the best strike price for selling options is a crucial aspect of options trading. It requires a careful consideration of various factors, including premium, win rate, Delta, and the expected move. By finding a balance between these factors, traders can increase their chances of success in the market.
Remember, the best strike price will depend on your individual preferences and risk tolerance. It is important to conduct thorough research and analysis, utilize indicators such as Thinkorswim’s Probability of Expiring Cone, and adapt your strategy based on market conditions.
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