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Choosing the Right Option Strike Price

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					Choosing the Right Option
Strike Price

   January 12th, 2008



                        Presented by: Dan Blanchard
Option Strike Price Chooser


   Choosing the right Option Strike Price is
    critical to making a profit.

   Pick the Strike based on the highest
    potential return and an appropriate Delta;
    not necessarily ATM or just ITM as
    suggested in the study materials.
Option Strike Price Chooser

   This is accomplished by using the following
    information:

       Determine the Target price that you think the
        stock price will go to.

       Calculate the potential return through a 3-step
        process for each Strike price.
Example




BA is trading at $98.65 and is expected to go to $103 before the July expiration.
Option Strike Price Chooser

1. Determine the Break Even price by adding
   the Strike and the Ask
 •   Break Even = Strike + Ask
Example




  Step 1. Break even is determined by adding the Strike and the Ask.
     (Strike + Ask = Break Even -or- $95.00 + $5.80 = $100.80).
Option Strike Price Chooser

1. Determine the Break Even price by adding
   the Strike and the Ask
  •   Break Even = Strike + Ask
2. Determine the profit by subtracting the
   Break Even from the Target
  •   Profit = Target – Break Even
Example                           Break Even - $100.80        Target - $103




 Step 2. Profit is determined by subtracting the Break even from the Target.
      (Target – Break Even = Profit -or- $103.00 - $100.80 = $2.20)
Option Strike Price Chooser

1. Determine the Break Even price by adding
   the Strike and the Ask
  •   Break Even = Strike + Ask
2. Determine the profit by subtracting the
   Break Even from the Target
  •   Profit = Target – Break Even
3. Determine the Potential Return by dividing
   the Ask into the Profit.
  •   Potential Return = Profit ÷ Ask
Example                                                        Profit - $2.20




 Step 3. Potential return is determined by dividing the Ask into the Profit.
      (Profit ÷ Ask = Potential return -or- $2.20 ÷ $5.80 = 37.9%)
Example

                                                                   Potential
                                                                    return
                                                                       15%

                                                                       19%
                                                                       23%
                                                                       31%
                                                                       38%
                                                                       15%
                                                                      (311%)
                                                                     (2900%)
                                                                     (12100%)


   In this case, the best return happens to be at the Strike that is ITM
Option Strike Price Chooser (Recap)

1. Determine the Break Even price by adding
   the Strike and the Ask
  •   Break Even = Strike + Ask
2. Determine the profit by subtracting the
   Break Even from the Target
  •   Profit = Target – Break Even
3. Determine the Potential Return by dividing
   the Ask into the Profit.
  •   Potential Return = Profit ÷ Ask
Option Strike Price Chooser



•   Once the potential profit is identified,
    the process of choosing can be further
    refined by use of the Delta.
    Option Strike Price Chooser
•     Use of a Delta at or above 75%
      (below -75% for Puts) will attain more
      desirable results due to providing for
      a larger move in the option price
      relative to the underlying security
      price.

•     Delta - The ratio comparing the change in the price of the underlying security to
      the corresponding change in the price of a derivative.
Option Strike Price Chooser



          Questions
Option Strike Price Chooser



       Excel Updates
Option Strike Price Chooser (Excel)

   Excel updates
       Ask column now auto updates
Option Strike Price Chooser (Excel)
       GR     Stock Symbol                                                               Enter data into shaded fields only

    $68.51    Current Stock Price
    $74.60    Target Price ( C lick her e f o r   A T M b r eak- even

     $5.00    Strike Price Increments
    May 08    Expiration Month/Year                                                      Chart Import from TOS

                                Break         Profit @              Potential             Intrinsic           Tim e
   Strike         Ask                                                            Delta
                                Even        Target price             Return                 Value             Value
     50
     55           $15.30          $70.30              $4.30               28%    88%        $13.51             $1.79
     60           $11.20          $71.20              $3.40               30%    79%         $8.51             $2.69
     65            $7.40          $72.40              $2.20               30%    67%         $3.51             $3.89
     70            $4.60          $74.60              $0.00                0%    51%        ($1.49)            $6.09
     75            $2.70          $77.70             ($3.10)             -115%   35%        ($6.49)            $9.19
     80            $1.40          $81.40             ($6.80)             -486%   22%       ($11.49)           $12.89
     85            $0.75          $85.75            ($11.15)            -1487%   12%       ($16.49)           $17.24
     90            $0.35          $90.35            ($15.75)            -4500%    6%       ($21.49)           $21.84
 The profits represented are guranteed returns based on the target price being hit at expiration.                      ►
 Time Value is not factored into these figures.
                                                                                                                     Clear
Option Strike Price Chooser (Excel)

   Excel updates
       Ask column now auto updates
       Delta column added
Option Strike Price Chooser (Excel)
       GR     Stock Symbol                                                               Enter data into shaded fields only

    $68.51    Current Stock Price
    $74.60    Target Price ( C lick her e f o r   A T M b r eak- even

     $5.00    Strike Price Increments
    May 08    Expiration Month/Year                                                      Chart Import from TOS

                                Break         Profit @              Potential             Intrinsic           Tim e
   Strike         Ask                                                            Delta
                                Even        Target price             Return                 Value             Value
     50
     55           $15.30          $70.30              $4.30               28%    88%        $13.51             $1.79
     60           $11.20          $71.20              $3.40               30%    79%         $8.51             $2.69
     65            $7.40          $72.40              $2.20               30%    67%         $3.51             $3.89
     70            $4.60          $74.60              $0.00                0%    51%        ($1.49)            $6.09
     75            $2.70          $77.70             ($3.10)             -115%   35%        ($6.49)            $9.19
     80            $1.40          $81.40             ($6.80)             -486%   22%       ($11.49)           $12.89
     85            $0.75          $85.75            ($11.15)            -1487%   12%       ($16.49)           $17.24
     90            $0.35          $90.35            ($15.75)            -4500%    6%       ($21.49)           $21.84
 The profits represented are guranteed returns based on the target price being hit at expiration.                      ►
 Time Value is not factored into these figures.
                                                                                                                     Clear
Option Strike Price Chooser (Excel)

   Excel updates
       Ask column now auto updates
       Delta column added
       Auto break-even target ATM
Option Strike Price Chooser (Excel)
       GR     Stock Symbol                                                               Enter data into shaded fields only

    $68.51    Current Stock Price
    $74.60    Target Price ( C lick her e f o r   A T M b r eak- even

     $5.00    Strike Price Increments
    May 08    Expiration Month/Year                                                      Chart Import from TOS

                                Break         Profit @              Potential             Intrinsic           Tim e
   Strike         Ask                                                            Delta
                                Even        Target price             Return                 Value             Value
     50
     55           $15.30          $70.30              $4.30               28%    88%        $13.51             $1.79
     60           $11.20          $71.20              $3.40               30%    79%         $8.51             $2.69
     65            $7.40          $72.40              $2.20               30%    67%         $3.51             $3.89
     70            $4.60          $74.60              $0.00                0%    51%        ($1.49)            $6.09
     75            $2.70          $77.70             ($3.10)             -115%   35%        ($6.49)            $9.19
     80            $1.40          $81.40             ($6.80)             -486%   22%       ($11.49)           $12.89
     85            $0.75          $85.75            ($11.15)            -1487%   12%       ($16.49)           $17.24
     90            $0.35          $90.35            ($15.75)            -4500%    6%       ($21.49)           $21.84
 The profits represented are guranteed returns based on the target price being hit at expiration.                      ►
 Time Value is not factored into these figures.
                                                                                                                     Clear
Option Strike Price Chooser (Excel)

   Excel updates
       Ask column now auto updates
       Delta column added
       Auto break-even target ATM
       Color options added
Option Strike Price Chooser (Excel)
       GR     Stock Symbol                                                               Enter data into shaded fields only

    $68.51    Current Stock Price
    $74.60    Target Price ( C lick her e f o r   A T M b r eak- even

     $5.00    Strike Price Increments
    May 08    Expiration Month/Year                                                      Chart Import from TOS

                                Break         Profit @              Potential             Intrinsic           Tim e
   Strike         Ask                                                            Delta
                                Even        Target price             Return                 Value             Value
     50
     55           $15.30          $70.30              $4.30               28%    88%        $13.51             $1.79
     60           $11.20          $71.20              $3.40               30%    79%         $8.51             $2.69
     65            $7.40          $72.40              $2.20               30%    67%         $3.51             $3.89
     70            $4.60          $74.60              $0.00                0%    51%        ($1.49)            $6.09
     75            $2.70          $77.70             ($3.10)             -115%   35%        ($6.49)            $9.19
     80            $1.40          $81.40             ($6.80)             -486%   22%       ($11.49)           $12.89
     85            $0.75          $85.75            ($11.15)            -1487%   12%       ($16.49)           $17.24
     90            $0.35          $90.35            ($15.75)            -4500%    6%       ($21.49)           $21.84
 The profits represented are guranteed returns based on the target price being hit at expiration.                      ►
 Time Value is not factored into these figures.
                                                                                                                     Clear
Option Strike Price Chooser (Excel)

   Excel updates
       Ask column now auto updates
       Delta column added
       Auto break-even target ATM
       Color options added
       Better Strike transitions (i.e. $2.5 - $5)
Option Strike Price Chooser (Excel)
     SBUX Stock Symbol                                                                         Enter data into shaded fields only

    $20.53 Current Stock Price
    $17.60 Target Price
     $2.50 Strike Price Increments
    Jan 09 Expiration Month/Year

                                                       Profit @
                                           Break                    Potential                      Intrinsic        Tim e
  Month         Strike         Ask                      Target                      Delta
                                           Even                      Return                          Value          Value
                                                         price
  Jan 09          10
  Jan 09         12.5
  Jan 09          15             $0.85       $14.15       ($3.45)    -406%             -15%          ($5.53)          $6.38
  Jan 09         17.5            $1.45       $16.05       ($1.55)    -107%             -24%          ($3.03)          $4.48
  Jan 09          20             $2.40       $17.60        $0.00       0%              -37%          ($0.53)          $2.93
  Jan 09         22.5            $3.70       $18.80        $1.20      32%              -51%           $1.97           $1.73
  Jan 09          25             $5.40       $19.60        $2.00      37%              -65%           $4.47           $0.93
  Jan 09         27.5
  Jan 09          30             $9.60       $20.40       $2.80        29%             -92%           $9.47           $0.13

The profits represented are guranteed returns based on the target price being hit.at expiration.
Time Value is not factored into these figures.
Option Strike Price Chooser (Excel)

   Excel updates
       Ask column now auto updates
       Delta column added
       Auto break-even target ATM
       Color options added
       Better Strike transitions (i.e. $2.5 - $5)
       Redundant Month column removed
Option Strike Price Chooser (Excel)
     SBUX Stock Symbol                                                                         Enter data into shaded fields only

    $20.53 Current Stock Price
    $17.60 Target Price
     $2.50 Strike Price Increments
    Jan 09 Expiration Month/Year

                                                       Profit @
                                           Break                    Potential                      Intrinsic        Tim e
  Month         Strike         Ask                      Target                      Delta
                                           Even                      Return                          Value          Value
                                                         price
  Jan 09          10
  Jan 09         12.5
  Jan 09          15             $0.85       $14.15       ($3.45)    -406%             -15%          ($5.53)          $6.38
  Jan 09         17.5            $1.45       $16.05       ($1.55)    -107%             -24%          ($3.03)          $4.48
  Jan 09          20             $2.40       $17.60        $0.00       0%              -37%          ($0.53)          $2.93
  Jan 09         22.5            $3.70       $18.80        $1.20      32%              -51%           $1.97           $1.73
  Jan 09          25             $5.40       $19.60        $2.00      37%              -65%           $4.47           $0.93
  Jan 09         27.5
  Jan 09          30             $9.60       $20.40       $2.80        29%             -92%           $9.47           $0.13

The profits represented are guranteed returns based on the target price being hit.at expiration.
Time Value is not factored into these figures.
Option Strike Price Chooser (Excel)

   Excel updates
       Ask column now auto updates
       Delta column added
       Auto break-even target ATM
       Color options added
       Better Strike transitions (i.e. $2.5 - $5)
       Redundant Month column removed
       Improved performance
       Improved LEAPS functionality
       Improved graphing
       All blue text/graphics are clickable
Option Strike Price Chooser (Excel)

   Excel updates
       Ask column now auto updates
       Delta column added
       Auto break-even target ATM
       Color options added
       Better Strike transitions (i.e. $2.5 - $5)
       Redundant Month column removed
       Improved performance
       Improved LEAPS functionality
       Improved graphing
       All blue text/graphics are clickable
Option Strike Price Chooser (Excel)

   Excel updates (Delta column)

       Due to the Delta column being added, it is very
        important to have the TOS platform properly
        configured to the right settings in order to
        function properly.
Option Strike Price Chooser (Excel)

   Excel updates (Delta column)

       Due to the Delta column being added, it is very
        important to have the TOS platform properly
        configured to the right settings in order to
        function properly.

       To properly configure the TOS platform, use the
        following steps:
Option Strike Price Chooser (Excel)

   Configuring TOS software
       Ensure the information layouts in the upper right
        corner of the TOS platform are set to Last X and
        Delta respectively. (Defaults are Last X and Net
        Change)
Option Strike Price Chooser (Excel)
Option Strike Price Chooser (Excel)

   Configuring TOS software
       Ensure the information layouts in the upper right
        corner of the TOS platform are set to Last X and
        Delta respectively.

       Ensure option type is set to Single.
Option Strike Price Chooser (Excel)
Option Strike Price Chooser (Excel)

   Configuring TOS software
       Ensure the information layouts in the upper right
        corner of the TOS platform are set to Last X and
        Delta respectively.

       Ensure option type is set to Single.

       These steps will allow the information to properly
        export to the Excel spreadsheet.
Option Strike Price Chooser (Excel)


           Questions
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