Reward/Risk Ratio

Discussion in 'Options' started by tradingjournals, Dec 22, 2012.

  1. I am interested in finding an expiration period, and a strike that would lead to the maximum Reward/Risk Ratio for a put option under the following conditions: Initial stock price 620, the holding period is 16 days, target price 541, volty 40, no carry cost. At end of day 16, the assumption is that the stock would be either at 620 (current price) or at 541.

    Is there a formula to compute the time(s) (in days) and the strike price(s) maximizing the Reward/Risk ratio under the above conditions?

    I could make an excel table, and run it for a matrix of strikes and expiration dates, but if someone has the answer and/or the table, could you please share the result and/or the table. Thanks.
  2. do the options already imply a 80 dollar move?
  3. It is a hypothetical example. The formula and/or the tools would me do an analysis with less effort.
  4. 1) You do realize you're asking for a "holy grail' don't you? :confused:
    2) Instead of an outright long-put position, different types of spread/combo postions centered around 541 or more likely, the 540 strike price, would provide a better reward/risk profile, i.e. the 545-540 put-debit spread, long-butterfly at 540, put-backspreads with the short-strike at or slightly below get the picture. :cool:
    3) If the market hits 541 as you hope/expect/believe, your rate of return WILL be mega-gigantic. If the stock remains at 620, you lose very little per spread/combo compared to buying outright premium that will decay vigorously. :D :p
  5. if it was me... and i didn't think that the market was expecting a decline.. meaning the move isn't priced in.. i would just outright by a deep otm put. but expect to lose your money..
  6. Waiting for a Santa Clause to give me the formula or post an excel sheet.
  7. Now which strike and expiration should the put has? I can assume that all expiration and strikes have the same volty (40).