Directional Trading · Options Trading Guide
Strike selection is a tradeoff among exposure, cost, time and the move required. Start with the research thesis rather than the smallest premium.
Write the decision before the contract
Specify expected direction, plausible magnitude, likely timing and evidence that would invalidate the view. Separate a forecast from a risk limit. A six month investment thesis and a two week earnings speculation require different contract analysis even when both concern the same company. Include the possibility that the best decision is no option position.
Compare candidate payoffs
A fictional stock trades at $100. A 100 call costs $6 and a 110 call costs $2 for the same expiration. If the stock expires at $108, the first earns $200 gross per standard contract while the second loses $200. If it expires at $115, their gross profits are $900 and $300. The cheaper contract has a larger percentage return in the second case but failed completely in the first.
Match time with uncertainty
A later expiration can require more cash while providing more time for the thesis and different volatility sensitivity. A near expiration can lose value quickly if the expected move is delayed. Compare the price of time with the research horizon. Avoid adding an expiration simply because it produces an attractive result in a historical chart selected after the event.
Rank complete alternatives
For each candidate, record premium at risk, spread width, target scenario, adverse scenario and planned exit date. Add a vertical spread and a share position as comparisons when relevant. Evaluate equal cash risk rather than equal contract counts. A 0.30 delta is not a universal optimum or a promise about winning probability. Preserve the reason for the selection so review can distinguish a poor contract choice from a reasonable choice followed by an unfavourable outcome.
Try it yourself
A thesis may take three months, but the cheapest option expires in two weeks. What information is missing before selecting it?
Show the worked answer
You need a reason the move should occur within two weeks, the loss if it does not, realistic execution costs and a comparison with expirations that cover the thesis horizon.
Further reading
Educational material. Examples and rates are hypothetical, not trade recommendations. Product terms, eligibility and risks vary by venue and jurisdiction.
