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Buying Put Options: How to Pick the Right Strike Price
http://www.financialspreadbetting.com/'>http://www.financialspreadbetting.com/ PLEASE LIKE AND SHARE THIS VIDEO SO WE CAN DO MORE! Buying put options at different strike prices and the decision we have to make as traders as to which strike to select. You want to buy put options right? As a reminder a put option is a bearish thesis on a stock. It is the right but not the obligation to sell short or sell that stock at the strike price at some predetermined point in the future. How do you decide which strike price to select?

You have XYZ stock trading at $50 and you believe its going lower. The good thing about put options is that the price could go to $1000 and you still don't lose more than what you've paid for the option. (as opposed to a straight short where you are losing every time the stock goes up a dollar).

How do we decide what strike to take?

Buying put options at different strike prices:

You have XYZ stock trading at $50
A $48.50 put is priced at $1
A $50 put is priced at $2
A $51 put is priced at $3
A $30 put is priced at $0.10

An option's price is generally made of intrinsic and extrinsic value; intrinsic value being the value in the deal. For instance the $51 put option has an instrinsic value of $1. Extrinsic value is made up of the time we have until the contract expires, the strike price and the implied volatility. Do we buy the put that is already 'inthemoney' but is the most expensive or the least expensive!?

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