Hello, I was wondering if there is a software or some online calculator that would help you choose the best strike price and exp. date based on your price prediction . Let say the stock trades at $100 You are predicting it will hit $120 i the next 3month . Which strike price and exp. date do you choose for the best return? Thank you.
With options you trade volatility in the first place and delta in the second. A software would need to be able to predict options volatility which is pretty difficult to pinpoint. Let's say you're told by the software that all things being equal you should chose the 6m 30 delta call, you're correct with your price prediction on the stock and volatility drops from 20 to 10. Your call is now at the money but it lost so much in vol that you're barely break even. It's not that easy, friend As a starter, look at the options volatility surface and historical vol. If vol is low relative to its history, take the strike and term with the lowest implied volatility, because it also gives you the most gamma. This will most likely be a front month option When IV is high relative to its history, you probably should not trade outright options anyways but buy a low IV call and sell a high IV higher strike call against it to protect you against a drop in implied vol
your view has to be more specific than that. Do you think it will hit 120 before 3 months? Will it touch 120? Or will it sit at 120? What’s your downside risk? Same questions pertain to the downside risk
Need minimum of three values. 1) Date and time to exit. (or tight range) 2) price of underlying at #1 (or range) 3) IV of underlying at #1 (ATM-IV for this is most precise) (or range) With the ranges, if ranges are not tight enough, you will observe dismal results. As stated before, nailing all 3 adequately may prove difficult. I wrote some code to help me do this, but my crystal ball needs polishing! BTW: Just discovered that TOS has a manual feature that will allow you to enter your three points (time is restricted to integer days, however), and may do a decent job for price of each option you examine.
Sheldon Natenbergs book is the right place to start, don't even bother with all the other retail crap. Right after that get his book: https://www.pierinoursone.com/ No other source explains the greeks as well as he does...a bit advanced though Do yourself a favour and really dive into this. With options you have seven dimensions that drive your P/L (underlying price, time, interest rates, volatility level, term structure, kurtosis and skew). While it is not at all necessary to factor in all of them for your trades, you at least have to know that they exist and how and to which extend they are going to influence your P/L. When I started out, I more often than not, had no clue why my P/L was moving and how I was making or losing money. I started to go down the rabbit hole when I met an oil trader who told me "when you want to be long, sell OTM calls and hedge delta" which totally confused me. Thing is, until you don't fully grasp those instruments, you have no idea about your actual risk which always leads to either blowups when you underestimate your exposure or you achieve mediocre results when you overestimate them. Even simple retail positions such as verticals or outright long calls and puts are subject to these dynamics, so do your best to understand them. Options are really scary and complex at first but they are wonderful instruments since they offer you the opportunity to diversify your opinion and create more ways for your position to win than just the price of the stock. It's really worth digging into them
The answers you got are great. It may take you decades to get to there. There’s a tool that this guy developed which does what you want at a primitive level. He explains the logic behind it if you buy his course. Nothing earth shattering there but nice tool.
Should you know your target underlying Price, time, and IV at your target exit, you are welcome to provide the details and I can run thru my simple tool for risk-defined simple options (long call/put, vertical spreads (debit and credit), and symetrical butterflys. The tool parameters shown below:
There are great answers above, but I think you will also need to factor in the level of accuracy/confidence of your prediction. For example, if you are very confident about your prediction, strike and expiration choice can be more aggressive, and vice versa.