Hey 5-Star Trader,
Trading options has undoubtedly changed my life for the best, but the road to where I am has been filled with its own unique ups and downs.
As a self-made trader who learned completely online, there were many questions I had to answer myself. One important question was, “How do you determine what strike price to select when buying or selling options?”
Knowing what I know now, I’d say selecting a strike is arguably the most important aspect of options trading. Usually, I like to pick options strikes based on the expected move, reasonable key psychological targets, and pairing it with a directional setup.
What is the difference between strikes when buying versus selling options?
If you’re selling options, you would want your key target to be outside of the expected move. However, if you are buying, you would want the price to hit that value.
Examples of key psychological targets…
The best tickers to trade in the options market, in this manner, are tickers that trade high volume and have a lot of open interest at key psychological values. A good example of this would include Microsoft (MSFT) to $340, Apple (AAPL) to $175, or Tesla (TSLA) to $1,100.
Putting it all together…
Once you have picked a proper strike it is important to follow it up with a directional setup. Personally, I like to consult the squeeze – otherwise known as a consolidation breakout – to determine potential directional moves.
Ultimately, trading is not a linear process. A sign of a great trader would be the continual reinvention of their own strategies and methods.
But, if we can master the basics, like setting a strike, we will all be better for it in the long run!