When choosing an option, there are so many more options to choose from than even just a couple of years ago. Due to the increased interest in options, the number of options traded has dramatically risen. With the higher volume of options trading, changes have occurred that have given traders many more choices of options. One of the big changes is the expiration times that are available. We now have weekly options to pick from in addition to monthly options. The weekly options are not available for those stocks that do not have much option activity. However, heavy option trading should almost guarantee weekly option availability.
Another change that occurred is the number of strike prices available. It used to be that as stock prices increased, the difference in strike prices widened. Where strike prices might be $10 apart, now they are $5 apart. Or strike prices might be $2.50 apart or $1 apart instead of $5 apart.
When choosing options, the first choice is picking the expiration. We want to pick an option that gives enough time for the price action we are expecting and then some. Once we pick the expiration, we can then focus on the strike price.
Under normal circumstances, a general guide is that out of the money options give the best % returns, but the stock movement needs to be greater. When implied volatility is high, then generally in the money options will give you the better returns.
The best way to choose an option is by using an option calculator. Determine some different price possibilities of your stock, good and bad. Determine the time that might be needed for those moves and then pick times a week or two longer or shorter. Run these possibilities through the calculator to see the theoretical value of the option for different strike prices and expiration dates. Figure the gain or loss from today’s price. Take the gain or loss and divide by today’s price for the % return. See which strike prices and time frames give the better returns.
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