Options Trading Tutorial

How to choose a stock strike price?

I'm looking at call options for a stock that has a price of 33, and am choosing between one with a strike price of 35 and one with a strike price of 40. Which call will cost me more and why? If the stock is not very volatile and there is little time left until expiration of the option, which would be more likely to pay off and why? If I think something is going to make the stock rise and if I don't mind losing your whole investment, which call is more likely to make me the most in percent terms and why?

Public Comments

1. learn more about options If you don"t know what your doing Stay AWAY from OPTIONS
2. The 35 strike price option will have a higher price than the 40 because it is closer to having an intrinsic value (difference between strike and stock price... as discussed both are out of the money and only have time value). In low volatility, the 35 strike price is more likely to pay off. It will pay off something for all outcomes >35 and <40 where the 40 call would expire worthless. If there is very high volality then the 40 call will fluctuate more. However, since the larger swings are also less probable, it's not possible to answer the question without specific numbers for the distribution of returns over the remaining time period.
3. you have to know what implied volatility beta gamma and theta are. if there is very little time left you time premium (theta) gets crushed fast. right now implied volatility is so high naked calls are extremely expensive. your closer to the money call will cost more becasue, well it is closer to being in the money. you don't say what kind of option it is (american or some other kind) which one will pay off? technically if they are priced correctly only the wind knows - how do you know where the underlying goes? know that you are taking a speculation on direction of the underlying plus you are also long vol (implied volatility) wich gets sucked out as expiration gets close. edit: sorry i meant to say the closer to the money will have a higher chance of paying off but once you factor in how much more expensive it is it shouldn't be any greater or lesser of a bet unless you ahve a specific opinion on the price of the underlying stock that is diferetn than what is priced in the option
4. When i am trading options i look at the three main things. The volatility of the stock. Previous levels of where the stock has been trading at and the expiration of the option. It would depend on the stock and the technical indicators. With less time and volatility the $35 one would pay off more because it is closer to the current price and has a higher percentage of being reached. For the home run i would buy the $40 strike price because the option is trading at a lower price so it can double or triple a lot easier. I hope that was not too hard to understand.