I have what is probably a straight forward option question, let's take tesla stock as an example. Currently at 811 and various strike prices. I added the ask to the strike price to get the break-even price. If I believe Tesla stock will go up, then why would I buy any other option other than the one that will cost 97.3? Even though it's more expensive the break even price is lower and hence I will make more money on this than compared to any other option? --Ask --- Strike ------ Current Price ----- Break even price 97.30 ---- 795 ------------- 811 ------------- 892.3 95.05 ---- 800 ------------- 811------------- 895.05 92.85 ---- 805 ------------- 811------------- 897.85 90.65 ---- 810 ------------- 811 ------------- 900.65 88.55 ---- 815 ------------- 811 ------------- 903.55 86.45 ---- 820 ------------- 811 ------------- 906.45 84.40 ---- 825 ------------- 811 ------------- 909.4 82.40 ---- 830 ------------- 811 ------------- 912.4
You would make about $1.70 extra. The further you go deep In The Money, the less extrinsic value on the strike premium. Then it depends on your approach, risk tolerance and strategy on which strike you decide to buy.
If you buy 9 of the $1300 calls for the same price as the 1 lot $795 call and TSLA closes in 30 days at $2,000 a share you make $630,000. If you bought the 1 $795 call you'd be sitting on only $123,500. If TSLA under $795 all options worthless. If TSLA at $1300 is worthless but you 795 call worth $50,500. So the question why would you buy the others is for the leverage in terms of where the price is at expiration and the potential payout. But obviously the odds of the break even move is less likely but oh wow the payout. All about the probability of happening which effects the price of the option among other factors. How bullish are you? What could go wrong buying a 9 lot of the 1300 calls for the same risk as the one lot at 795? Are you looking to just be long TSLA with the highest probability of making money on the trade? Or do you have a specific target on where you think it would go?
If you buy the 790 strike, the break-even price will be even lower than the 795 so why not that one? If you buy the 780 strike, the break-even price will be even lower than the 790 so why not that one? The deeper ITM (in-the-money) strike you buy, the lower the break-even price but the more money you'll have to pay. So if you're wrong and the price closes @ 700 then your losses are less if you bought a strike closer to the current stock price.
FYI Also consider selling an option at the break even point - make it a Debit Spread. Buy 795 at 97.30 and Sell 890 at $60.70 Buy 800 at 95.05 and Sell 895 at $59.15 Buy 805 at 92.85 and Sell 900 at $57.50 ...... ...... ......
Picking a strike price has also something to do with time frame. If you're looking for a quick play than an ITM option may be a good choice but, if you're looking at couple of months out than a near OTM option may be the better choice.
If you buy at ask, statistically speaking, all of them have negative expectancy. MM has to take their cut to stay in business. So, statistically speaking, don't buy at ask. In your example, which one I pick depends on my expectation of the underlying movement.
Try to carefully analyse and look at the time frame before opting a strike price. Try not to buy at ask.