Choosing the Best Strike Price

Make sure you're not overpaying for unnecessary premium.

   

We look at one of our newest positions in SlingShot Trader to show you how we determine which options strike price is best.

Video Transcript

Based on Ebix’s (NYSE:EBX) current trading position, we bought the $15 strike puts, which is considered to be out of the money. Any time you have a strike price below the stock price, when you’re talking about puts, it’s an out-of-the-money strike price.

We could have chosen an in-the-money strike price to have been a little more conservative, but what we’re anticipating is that we’re going to get a drop in the value of EBX, at least bringing the stock down to the previous support level around $13. We wouldn’t be surprised if it dropped even lower, but that is the level we are anticipating that EBX will at least dropping down to.

Ebix will release earnings in just over a week on Thursday, March 14, and we feel it is going to move down toward the lower levels we highlight on the chart in the video. By choosing the out-of-the-money strike price, we give ourselves the potential for a larger percentage return if the stock does move that direction.

If we had bought an in-the-money strike price – either up at $16 or $17 – we would have had to pay more upfront to get into the trade. We would have had less volatility in the trade, but also less of a chance of making a larger return. So, at SlingShot Trader, we have made the conscious choice to be more aggressive in our options trading strategy, which means that we are going to have more trades do end up on the losing side than if we were to only choose deep-in-the-money-options. We do have a little more volatility in our options prices, but it also gives us much greater upside potential when we have a move that goes our way.

 


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