How to Select the Right Strike Price Trading Options?

hi guys welcome back to my channel if you're new to the channel my name is maciej treats in today's video I'm gonna break down strike prices for you guys so exactly determining the differences between the strikes what to consider before you select a strike and execute on a trade and then exactly how I select my strikes I'm gonna go through all that with you guys so yeah let's go ahead and get started alright guys so here we go so what is a strike brace so a strike brace is pretty much defined as the price at which a call or put option can be exercised what that really means is kind of in layman's terms is basically for a call options it's where the security can be bought by the option holder and then for a put option it's the price at which the security can be sold by the option holder so why do we care about strike price what does it mean to us how does it affect us when we're trading options so basically it plays a really huge part in how your options contract is gonna play out it does there's a lot of risk involved depending on what option contract you decide to select so if your not selecting the correct strike price or if you don't understand the risk involved in certain strike prices that you select you could incur bigger losses and take on more risk unknowingly so it's really really important to understand what a strike price is the difference is between all of them and what the most the most beneficial strike price would be for you for your specific trading setup or strategy etc etc so basically there's three different strike prices there's at the money in the money and out of the money strike prices so when we say at the money in the money or either them and you were basically describing the moneyness of the option so it that so the Magnusson option describes the relationship between the the options strike price and then the current market value of the stock so that's what we mean when we're saying in the money out of the money at the money we're describing the moneyness and the moneyness describes the relationship between an option and the current market value of the stock so that's that that's a kind of basics of what strike prices and what you need to know about that and then let's go into how we decide which strike price is the most beneficial for you and what you need to consider before you're selecting a certain strike price or before you take on that trade so basically the first thing is the first two things are risk tolerance and your desired restored payout user should already be a part of your trading strategy so you should already know how much risk you're willing to take on that specific trade and you should already know what your risks are word ratio is for that specific trade before executing so none of these these two things shouldn't be anything new to anybody because they should already be implemented in your trading strategy and if they're not they need to be implemented in your trading strategy they're key components to any plan so if you're if you don't have them already in your strategy or your plan before you execute on a trade I do highly recommend making sure you add these two to your trading plan and making sure that you consider both of them before taking on or executing a trade so let's go into the different strike prices so like I said you have three different strike prices the first one we have here is in the money strike prices so in the money refers to a strike price or an option that has intrinsic value which means that it which means it intrinsic value describes what an asset is worth I don't know why it was so difficult to get out but um so when we say in the money it's an option that has intrinsic value so that's describing with asset is worth so in the money options are less riskier than out of the money options and the only thing with them is yeah there are less riskier but the premiums are going to be more expensive so it's going to cost you more to take on that trade so say for example you want to buy a call option so a call option is in the money if the market price of the stock is above the strike price so what that means for example say you want to trade nvidia in video is currently trading at $300 and you want to buy a call option with a strike that's in the money so you would buy a strike that is below 300 so call option in the money would be a strike price would would be if the market price is above the current strike price so if nvidia is trading at 300 you want to buy a call option in the money you would buy a strike price that is less than 300 the other hand if you were to buy a put option in the money output option is in the money when the market price of the stock is below the strike price so going back to that in a video example if it's trading at $300 you want to buy a put option in the money strike on a video trading at $300 you would buy one that is you would select the strike that is greater than 300 that would be your in the money put option strike price for Nvidia trading at $300 so what are some differences between I have the money and the money so out of the money strikes don't have intrinsic value it will always be zero they do have extrinsic value which is which means they have time value obviously further out the further out your expiration is the higher the extrinsic value because you have more time on that specific contract o these strikes are going to be higher risk compared to your in the money strikes however they are gonna be cheaper because the premiums are going to be less expensive than your in the money or at the money strike so that is one of the key differences between them you're at the money are your riskier strike prices however they are your cheaper stroke prices as well so those are specific things to take into consideration so you can see how this directly correlates to this key components of how to determine a strike price which is your your risk of a word payout and your your overall risk that you're willing to take so you can see that one is riskier one is less riskier one cost more one cost less so that's why you really want to make sure that you have all of those key components to your strategy and your plan in place before you're deciding what strengths to pick all right guys so for example if you want to buy a call option out of the money the market value of the stock is gonna be below the strike price that is your out of the money call option so for example going back to the Nvidia example of new videos trading at $300 and you want to buy an out of the money call option you're gonna buy a an option with a strike price that is greater than the 300 now on the opposite hand if you wanted to buy a put option out of the money this would mean this means that the market value of the stock is above the strike price so again going back to Nvidia example if you want to buy a put option on a video that's currently trading at $300 and you want to buy an out of the money strike you're gonna buy a strike that is less than $300 all right guys so the last one we have here is at the money so at the money strikes um they obviously have less risk involved and they have no intrinsic value they only have time value but with that less risk involved with these strikes they are more expensive because the premiums are going to be higher and then usually when people are trading at the money strikes or the traders are select anthem any strikes they're expecting a bigger move on either side so when we're describing like time by value I do want to let you guys know that I'm so at the money when a strike is at the money the time value is at its maximum versus when a you have a in the money or out of the money strike price the time value is decreasing as the option goes deeper and the money are out of the money so just let you guys know what that means as well so let's go ahead and open the options chain and I'll show you guys on the options Shane exactly what it looks like so maybe that'll be a little bit more helpful for you guys alright guys so here is the options chain for you so I have Nvidia here open you can change to whatever you want this is your data expiration so May 8th is when these contracts are expiring and then further out is further out obviously so may 15 may 22nd May 29th so here is May 8th option chain for Nvidia here your strikes here for Nvidia now I always keep my default strikes to 10 but you can keep you can pull all of them up if you want it's just a lot for me to scroll through and I'm scalping and I don't buy out-of-the-money strikes like that way out of the money so I don't need to have all of these open it's just very clean Christmas way for me to be able to view it alright guys so here I have nvidia up here i'm gonna go through the three examples um moneyness with you guys here so safer Nvidia you want to buy at the money strike right now and in bit Nvidia and it's currently trading at 28278 one thing that I forgot to tell you guys is at the money sometimes it's called near the money as well which describes like if if the stock is within 50 cents of the current of the strike price that you're selecting it's still at the money so because none of these strikes are identical to the 28278 the closest one within 50 cents is going to be your 280 250 and that is you're at the money strike price so if you were to select at the money on Nvidia you're gonna select the 280 250 strike price now that being said say you want to buy an in the money call and in the money put so like I said you're in the money calls are gonna be your strikes that are less than the current market price so the current market price innovation has 28278 so you're in the money strikes are gonna be all of these right here so your 272 to 75 to 77 50 to 80 all of these are gonna be your in the money call so over here now if you want to buy in the money puts on Nvidia you're in the money puts are going to be greater than what Nvidia is currently trading at so you're in the money puts are going to be your 95 to 92 to 92 8750 in your to 85 strikes are gonna be you're in the money puts now I'll say for example you want to buy out of the money so you want to buy an out of the money put you're out of the money puts are gonna be less than what the current market price is trading at so these are gonna be you're out of the money put so you're to 8277 to 75 and to 75 50 and then you're out of the many calls are gonna be your higher than what the current market price is so it's gonna be your to 95 to 92 50 to 90 to 80 750 and to 85 those are gonna be your out of the money call best way to kind of visualize it is you're they're kind of across from each other so in the money calls in the money puts out of the money puts out of the money calls so that's kind of the best way to kind of visualize it in the easiest way and then right here in the middle is gonna be your at the money strike prices alright guys so let's go through my strategy of my personal opinion and what I like to do when I'm trading options um or scalping options so I just give you guys an overview of kind of the basics and you guys can you know take all of that in and determine what strategy works for you and what strikes work for you me personally this is just what I have come to see in like understand and and and this is how I just trade and scalp options it's been working for me when I'm selecting strikes I just told you guys that if NVIDIA is trading at 28278 anything within 50 cents of that is still at the money because we call it near the money for me the 280 250 and the 285 are both gonna be at the money I know the 285 is technically out of the money say for example Nvidia is trading at 28278 so my two strikes that I'm gonna look at right now is the 280 250 and the 285 and I want to buy a call on NVIDIA so I go ahead and look at the volume on both of these strikes and you can see the obviously the volume and the open interest on the 285 strike are the highest to me those look more favorable the 285 strike looks more favorable in my opinion that's just how I trade and how I've always traded it easy for me I can easily catch it when I'm looking to scalp I don't have to make really like I don't have to look through the options change too much I really just look at the first two at the money strikes here and the one I select the one with the highest open interest in volume that's always how I've done it it just worked for me less risk the premiums are a little bit more expensive but I would rather take on less risk because when you're scalping you're already taking on a great deal of risk so if you add more risk to the risk that you're already taking on when you're scalping it's gonna be a mess so I'll I've decided that it's just easier and and and more beneficial for me to just select a premium that's a little bit more expensive less risk especially when you're scalping and pay a little bit more and be be confident in that trade and not get shaken out or anything like that so I always buy the first you add the money strikes right here so these are your two these are what I consider at the money and then the highest volume and open interest same thing on the put side and that's how I select my strike price so like I said this has this is just a strategy that's worked for me I've given you guys like a lot of information on strike so obviously do your own research do your own practice and find out what works best for your strategy because obviously I'm scalping so some of you might be swinging day trading so it's going to be a little bit of a different strategy for each of you so all right guys let's it for this week's video thank you so much for watching if you found the video helpful go ahead and like and subscribe to my page if you have any questions regarding anything in the video go ahead and comment down below or shoot me a DM and I'll be sure to respond and yeah I'll catch you guys in next week's video

Channel: MasiTrades

Views: 130,308

Rating: 4.7150397 out of 5

Keywords: bitcoin, day trading, trading, investing, investment, millionaire mindset, millionaires, options trading, stock market, stocks, wallstreet, blockchain, market makers, passive income, financial freedom, trades, tsla, apple, amazon, options, strike price, day trade, scalping, charting, charts, thinkorswim

Id: TsR-KJ6ANWg

Length: 15min 18sec (918 seconds)

Published: Sun May 03 2020