August 11, 2025 • 17 mins
"How do I choose the right strike price and expiration date for an option?" That's the question we're tackling on this episode of the Options Trading Podcast.
We're moving beyond the basics and diving into the strategic logic behind these crucial choices. We discuss how to align your trade with your market view, manage risk, and understand the impact of moneyness, volatility, and Theta decay on your premium and profit potential. We also mention that your broker platform likely provides a Probability of Profit (POP) calculation to help guide your decisions. Ready to refine your options approach?
What's the most challenging part of choosing a strike price or expiration date for you? Share your thoughts with us, and don't forget to subscribe to the Options Trading Podcast for more step-by-step guidance.
Key Takeaways
- Your Market View is the Starting Point: Before looking at an options chain, you must have a clear directional view (up, down, or flat) and decide if you're trading aggressively or conservatively.
- Moneyness Affects Risk and Reward: The relationship between the strike price and the current stock price (in-the-money, at-the-money, out-of-the-money) directly impacts an option's premium, profit potential, and probability of success.
- Time is Not Free: The time component of an option is tied to how long you expect your trade idea to play out. Option buyers should be mindful of Theta decay, which causes an option's value to decrease over time, especially as expiration approaches.
- Sellers vs. Buyers: The goals for option buyers and sellers are different. Buyers generally want the stock to move in a specific direction , while sellers often want the option to expire worthless, allowing them to keep the collected premium.
"This isn't about predicting the future perfectly... it's more about aligning your trade with how you see the market, what you want from that specific trade, and importantly, how much risk you're okay with."
Visit WeLoveOptions.com/1DTE for a free guide to mastering 0DTE and 1DTE options strategies, or join our free live case study webinar at WeLoveOptions.com/case-study to see how one trader turned $10K into $25K in just 90 days.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:03):
Welcome to the Options Trading Podcast.
We're on a mission to empowerindividual investors with the
knowledge they need.
Join us as we break downcomplex topics into simple,
step-by-step guidance forconservative options trading.
Speaker 2 (00:16):
Okay, let's unpack this.
You're looking at an optionschain, right, and those two bits
strike price, expiration datethey can still kind of make you
hesitate, even if you've dealtwith them before.
It's not just knowing what theyare, it's really understanding
how to, you know, use themstrategically when you trade.
That's what we're focusing ontoday.
Speaker 3 (00:36):
Absolutely, and we're not just going to rehash the
absolute basics.
We're looking at a guide herethat digs into the logic behind
it.
All Right, we're looking at aguide here that digs into the
logic behind it, all Right, theprobabilities, the practical
stuff you need to consider whenmaking these honestly crucial
choices.
Think of it as refining yourapproach, moving beyond level
one.
Speaker 2 (00:53):
Yeah, getting a better feel for the levers
you're actually pulling.
Speaker 3 (00:56):
Exactly.
Speaker 2 (00:57):
Because, look, this isn't about predicting the
future perfectly.
Nobody can do that.
It's more about aligning yourtrade, aligning it with how you
see the market, what you wantfrom that specific trade and,
importantly, how much riskyou're okay with.
Speaker 3 (01:12):
Couldn't agree more.
And just so we're all on thesame page as we go deeper,
remember the strike price that'sthe price where you can buy or
sell if the option getsexercised and the expiration
date, that's simply the last daythe contract is actually valid.
These two things are wellfundamental to how an option is
priced and how it behaves.
Speaker 2 (01:33):
Exactly, it's that interplay, isn't it, between the
strike and the current price,and then you've got the clock
ticking down with the expiration.
That whole dynamic shapes thetrade.
Speaker 3 (01:38):
It really does the potential upside, the potential
pitfalls.
It all comes from that.
Speaker 2 (01:43):
So our goal today is to just elevate your
understanding of how thatdynamic works.
Speaker 3 (01:47):
Precisely so you can move past, just you know,
reacting to the numbers on thescreen and start making more
deliberate strategic choices.
Speaker 2 (01:54):
Okay, let's get into it.
Then the source material reallyhammers home that the starting
point always has to be your viewon the market.
Where do you think things aregoing?
Speaker 3 (02:05):
That's spot on.
Before you even glance at astrike price, you need that
directional view.
Is it up down or maybe justflat?
Speaker 2 (02:11):
And how big a move.
Speaker 3 (02:12):
Right.
Is it going to be a little bumpor massive shift?
Are you playing it aggressivelyor more conservatively, and are
you buying the option, hopingfor that move or selling it,
maybe hoping it doesn't move toomuch?
Speaker 2 (02:24):
So those inical thoughts really guide everything
that follows?
Speaker 3 (02:27):
They absolutely have to.
It's not just a vague feeling,it's forming a kind of thesis,
even if it's just for the shortterm.
Speaker 2 (02:34):
And that thesis leaves us straight into
understanding moneyness.
Speaker 3 (02:38):
Ah, yes, moneyness, the relationship between the
strike price and where the stockis trading right now.
We're talking in the money, atthe money, out of the money.
Itm, atm, otm.
Speaker 2 (02:50):
Right.
So for a call option where youwant the price to go up.
Itm means the strike is alreadybelow the current price.
Makes sense and for a putoption where you profit.
If it goes down, itm means thestrike is above the current
price.
Oh sure, atm at the money.
That's pretty straightforward.
Strikes really close to thecurrent price.
Speaker 3 (03:08):
Right around the current trading price.
Speaker 2 (03:09):
An OTM out of the money is just the opposite of
ITM.
For a call the strike's higherthan the current price.
For a put it's lower.
We've touched on this before,but the implications are huge.
Speaker 3 (03:20):
They really are.
It's not just about where thestrike sits relative to the
price.
Moneyness directly impacts theoptions, cost, the premium and
also its profit potential and,importantly, the probability
that it'll actually be worthsomething come expiration.
Speaker 2 (03:36):
OK, so let's apply that.
Say you're bullish, you want tobuy calls, yeah.
How does moneyness affect thatchoice?
Speaker 3 (03:45):
Well, think about an ITM call.
It's already got intrinsicvalue right, so the premium is
going to be higher.
More expensive, more expensive,yeah, but generally the risk is
considered a bit lower and yourprobability of ending up
profitable is higher.
The percentage gain might notbe astronomical, though.
Ok, now, atm calls are kind ofthe middle ground Medium premium
, medium risk, decent shot at agood profit if you're right
(04:07):
about the direction.
Speaker 2 (04:08):
And the OTM calls the cheap ones.
Speaker 3 (04:11):
Right.
They're the cheapest up front.
They offer the biggestpotential percentage return if
the stock makes a really bigmove your way.
But and this is a big but therisk is much higher.
Speaker 2 (04:22):
Lower chance of actually paying off.
Speaker 3 (04:23):
Exactly A lower probability of expiring in the
money.
And the source mentionedsomething key about Delta here
ITM and ATM calls they havehigher Delta, which means their
price tracks more closely withmovements in the actual stock
price.
Speaker 2 (04:36):
Ah, so they react more immediately.
If the stock moves, yeah,that's useful.
Okay, flip side You're bearish,you buy.
Puts Same logic.
Speaker 3 (04:44):
Pretty much the same logic applies.
An ITM put costs more, lessrisk, perhaps moderate profit
potential, higher chance ofsuccess.
Atm puts again balanced.
By the OTM puts yeah, thesource gives a strong warning
there, especially deep OTM putsthat cheap premium looked
tempting, but if the stockdoesn't drop significantly and
(05:05):
quickly that premium can justevaporate.
Poof gone, gone.
The chance of losing yourentire investment is very real.
Speaker 2 (05:11):
Definitely something to watch out for.
Okay, what about the other sideSelling options to collect that
premium?
The goal is different here,isn't it?
Speaker 3 (05:18):
Totally different here.
You generally want the optionto expire.
Worthless Time passing is yourfriend.
Speaker 2 (05:23):
So, like a covered call, you own the stock already.
Speaker 3 (05:26):
Exactly.
You own the stock.
You want some income.
You might sell a slightly OTMcall, maybe even an ATM call.
You collect the premium.
And if the stock goes up pastyour strike then you might have
to sell your shares at thatstrike price, which you should
be okay with if you're sellingthe call.
Speaker 2 (05:41):
Right, you've accepted that possibility.
What about a cash secured put?
Speaker 3 (05:45):
That's where you're saying, hey, I'd be happy to buy
the stock if it drops to acertain price.
So you sell an OTM, put at thatprice you like.
Speaker 2 (05:53):
And you get paid the premium up front.
Speaker 3 (05:54):
You get paid up front .
If the stock drops to yourstrike, you buy the shares
effectively at a discountbecause of the premium you
received.
If it stays above, you justkeep the premium, win-win
potentially and things likecredit spreads Often involves
selling an option maybe slightlyOTM to get that premium, but
(06:15):
then you also buy a further OTMoption as protection.
As protection exactly.
It defines your maximum riskand your maximum potential
profit.
The source notes here that ifyou're selling going further,
otm generally increases yourodds of the option expiring
worthless.
Speaker 2 (06:29):
Which is what you want as a seller.
Speaker 3 (06:30):
Right, but the tradeoff is you collect less
premium up front.
It's always that balanceProbability versus reward Makes
sense.
Speaker 1 (06:40):
Sick of babysitting your trades, stressing over
volatility and still walkingaway with crumbs.
It's time to flip the script.
At WeLoveOptionscom, slash 1DTE.
You'll get free, instant accessto a powerful guide Mastering
the Art of 0 DTE and 1 DTEOptions your blueprint for
consistent daily profits usingthe most popular option
(07:01):
strategies on the market.
This isn't theory.
It's tested with real money,real rules and zero fluff.
Go to weloveoptionscom, slash1DTE that's the number 1DTE now
and grab your free copy.
You've got trades to make andthis guide will show you how.
Speaker 2 (07:22):
OK, now probability of profit or POP.
I see that on my brokerplatform.
What's it really telling me?
Speaker 3 (07:28):
Yeah, most platforms estimate this now.
Pop is basically the platform'scalculation, based on current
models, of the chance that yourspecific trade setup will make
at least like one penny byexpiration.
Speaker 2 (07:40):
So higher POP means safer.
Speaker 3 (07:42):
Generally yes.
A higher POP, maybe 70 percentor 80%, suggests a more
conservative trade, Higherlikelihood of a small gain or
breaking even.
Sellers often look for high POP.
Speaker 2 (07:52):
Oh, with AOP.
Speaker 3 (07:53):
Lower POP, say 30% or 40%.
That indicates a morespeculative trade, lower odds of
success.
But the potential payout couldbe much larger.
If it works, some aggressivebuyers might go for that.
Speaker 2 (08:04):
So it helps you match the trade's odds with how much
risk you're comfortable takingUseful.
How does the stock's ownvolatility play into picking a
strike?
Speaker 3 (08:13):
Oh, massively.
Volatility is a huge factor inoption pricing Right High
volatility stocks, the ones thatswing around a lot.
Their options are going to bemore expensive.
Speaker 2 (08:21):
Because there's more uncertainty.
Speaker 3 (08:23):
Exactly.
More potential for big movesmeans higher implied volatility,
higher premiums.
So if you're trading options ona volatile stock, you might
need to use wider spreadsbetween strikes.
If you're doing spreads or ifyou're selling premium, maybe go
further OTM to give yourselfmore room for error.
Speaker 2 (08:40):
And low volatility stocks the steadier ones.
Speaker 3 (08:43):
Their options are cheaper.
Less expected movement meanslower premiums, so you might
need to choose strikes closer tothe current price to get any
decent premium.
If you're selling or for abuyer, maybe you can afford to
buy something closer to themoney.
Speaker 2 (08:57):
Okay, that covers strikes pretty well, let's
switch gears to the other bigdecision the expiration date.
Speaker 3 (09:03):
Right, the time component.
This is completely tied to howlong you expect your trade idea
to take to play out and justyour general trading style.
So if you're thinking a quickmove, just days or a week or two
, Then you're probably lookingat weekly options or maybe the
closest monthly expiration For amedium-term swing trade, maybe
a few weeks to a month or twostandard monthly options usually
(09:23):
fit.
Speaker 2 (09:24):
And for the really long-term bets.
Speaker 3 (09:26):
Then you're into unack-ass territory.
Long-term equity anticipationsecurities these have
expirations months, even a yearor more out.
The key question is always howmuch time does my thesis
realistically need?
Speaker 2 (09:42):
Is it a quick pop after earnings or a slow grind
upwards over months?
Speaker 3 (09:46):
Exactly.
That dictates the time frameyou need to buy.
Speaker 2 (09:49):
And time with options isn't free, is it?
There's theta decay.
Speaker 3 (09:53):
Theta, the time decay factor.
It's the measure of how muchvalue an option loses purely
because time is passing.
Speaker 2 (10:00):
And it speeds up.
Speaker 3 (10:01):
It speeds up dramatically as you get closer
to expiration, especially inthose last, say, two or three
weeks.
Speaker 2 (10:05):
So who does that hurt and who does it help?
Speaker 3 (10:07):
Well, it's bad news for option buyers their asset is
literally melting away each day.
But it's great news for optionsellers.
They want that decay, hopingthe option expires worthless, so
they pocket the premium.
The source had a table on thisright, linking time left to
decay speed.
Yeah, basically Less than aweek left.
Very fast decay, cheap premium,best for maybe experienced
(10:27):
sellers or very short-term plays.
A week to a month moderatedecay, medium cost.
30 to 90 days.
Slower decay, higher cost,often good for buyers who need
time for their idea to work.
And then six, 12 months or morevery slow decay, expensive
premium.
That's LAPS territory.
Speaker 2 (10:44):
So, as a buyer, you typically want to buy more time
than you think you need.
Speaker 3 (10:47):
Generally, yes, give your trade room to breathe.
Maybe look 30, 60, 90 days out,depending on the plan.
Unless, like the source says,you're specifically day trading
or playing a very near-termevent, buying those super
short-dated options can bereally risky because of that
rapid theta decay.
Speaker 2 (11:02):
Right and for sellers .
Speaker 3 (11:03):
Sellers often like that sweet spot, maybe 15 to 45
or 60 days out.
Speaker 2 (11:08):
Yeah.
Speaker 3 (11:08):
Enough time for decay to work in their favor decent
premium, but not tying upcapital for too long or taking
on too much long-term risk.
Speaker 2 (11:14):
Okay, and how does this specific strategy influence
the expiration choice, likelong calls versus credit spread?
Speaker 3 (11:22):
Yeah, there's definitely a connection.
If you're buying astraightforward call or put,
hoping for a sustained move, yougenerally want more time 30, 60
, even 90 plus days.
Short term speculation maybe 7,14 days.
Credit spreads covered calls 15to 45 or 30 to 60 day range.
(11:44):
You're balancing premiumcollection with decay speed ETS.
Obviously you're looking sixmonths to two years out and
earnings plays.
That's tricky, maybe a week ortwo after the announcement.
But trading through earnings isa whole different ballgame.
Speaker 2 (11:58):
Yeah, speaking of earnings.
Speaker 3 (11:59):
Yeah.
Speaker 2 (11:59):
Those big news events .
They mess with option pricesbeforehand right Implied
volatility.
Speaker 3 (12:04):
Oh, absolutely Everyone knows earnings are
coming or some big announcement.
The uncertainty drives updemand for options, pushing up
implied volatility or IV.
Speaker 2 (12:12):
So options get expensive just before the news
hits.
Speaker 3 (12:14):
Very expensive, but here's the kicker Right after
the news is out.
Even if the stock moves likeexpected, that uncertainty
disappears Poof and the IVcollapses 5E crush, they call it
, and that can seriously hurtthe value of the option,
especially for buyers who boughtright before the event.
Speaker 2 (12:31):
So if you're buying before news, maybe buy more time
, go further out.
Speaker 3 (12:35):
That's often wise.
Yes, Give yourself time to rideout that potential IV crush, or
just avoid buying right beforeunless you really know what
you're doing.
Sellers, on the other hand,might like that high pre-event
5E, hoping the stock doesn'tactually move much and they can
profit from both data decay andthe 5E crest no-transcript.
Speaker 2 (12:56):
The Greeks Theta, delta, gamma.
How do they play in here?
Speaker 3 (13:02):
Well, we've hit theta time decay.
Delta, remember, is sensitivityto the stock price move, gamma
is the rate of change of delta.
Speaker 4 (13:08):
Okay.
Speaker 3 (13:08):
The key thing with expiration is gamma risk.
As you get really close toexpiration, gamma can get very
high.
This means the options deltacan swing wildly with even small
moves in the stock.
Speaker 2 (13:18):
So the option price can jump around like crazy.
Speaker 3 (13:20):
Exactly Very unpredictable rapid price
changes in those last few daysor hours.
If you want a smoother ride,avoiding that intense gamma risk
, then a longer expiration helps.
If you're seeking thatexplosive potential for a very
short-term trade, maybe youembrace the gamma, but you have
to be ready for volatility.
Speaker 2 (13:38):
Okay, wow.
Speaker 1 (13:41):
Tired of strategies that look good on paper but
never work in real life.
Join our free live case studywebinar at weloveoptionscom
slash case study and discoverexactly how one trader turned
10K into 25K in just 90 daysusing low-risk option strategies
.
No fluff, no theory, just realtrade breakdowns in real time.
(14:02):
We'll show you the exactentries, exits, risk management
techniques and profit numbersfor every trade, Plus, peek
behind the curtain to understandthe critical decision points.
Seats are limited.
Grab your spot now atweloveoptionscom slash case
study.
Speaker 2 (14:17):
That's a lot on strikes and accelerations.
The source wraps up with a neatfive-step checklist to kind of
bring it all together.
Speaker 3 (14:22):
Yeah, it's a good practical summary.
Step one what's your outlook?
Bullish, bearish, neutral?
That guides your strategychoice.
Speaker 2 (14:30):
Step two buying or selling.
Buyers need movement and timeSellers like time decay.
Speaker 3 (14:36):
Step three how much capital do you have and what's
your risk tolerance that steersyou towards OTM if you're using
less capital or taking more risk, or maybe closer to the money.
Itm if you have more capital orwant lower risk for a trade.
Speaker 2 (14:49):
Then step four gives some rules of thumb for strikes
based on expectations, like ifyou expect a strong move and
you're buying maybe ATM orslightly OTM, smaller move,
maybe ITM for the higher delta,expecting sideways Sell OTM,
range bound.
Look at spreads.
Speaker 3 (15:04):
And step five is picking the expiration based on
timing.
Quick trade Weeklys, maybe.
High risk Swing trade Monthly.
Conservative buyer 30, 90 days.
Premium seller Often 15, 45days.
Long-term idea Ilya PS Sixmonths plus.
Speaker 2 (15:20):
That's a really practical way to think through
it.
The source also flags somecommon mistakes, doesn't it?
Pitfalls to avoid.
Speaker 3 (15:30):
Oh yeah, crucial reminders like don't buy too
short an expiration if yourtrade idea needs weeks or months
to develop.
That's just setting yourself upfor failure.
Speaker 2 (15:35):
Or buying those super far OTM lottery tickets,
expecting a miracle.
Speaker 3 (15:39):
Exactly Unrealistic expectations.
Also just forgetting about timedecay when you buy an option,
especially a longer dated one,it's still working against you.
Speaker 2 (15:47):
Just slower and for sellers.
Speaker 3 (15:49):
Understanding assignment risk is key Knowing
what happens if your shortoption goes ITM.
And just basic stuff likealways checking if there's an
earnings report or major newscoming up right around your
expiration date.
Speaker 2 (16:00):
Seems obvious, but easily missed.
And that final summary tablelooks useful too.
Report or major news coming upright around your expiration
date Seems obvious, but easilymissed.
Yeah, and that final summarytable looks useful too, just
comparing buying versus sellingside by side.
Speaker 3 (16:06):
Yeah, it lines up strike choices, itm versus OTM,
expiration longer versus shorter, how time decay affects you
negative for buyers, positivefor sellers, the best scenarios
for each strong move versus slow, no move, and even typical POP
ranges.
It's a good quick reference.
Speaker 2 (16:23):
So, wrapping this all up, it feels like choosing the
right strike and expirationisn't about finding the magic
combination, is it?
Speaker 3 (16:28):
Not at all.
There's no single perfectchoice.
It's really about a disciplinedprocess.
It's about aligning the tradeyou put on with your view of the
market, your tolerance for riskand the time frame you think is
needed.
Speaker 2 (16:40):
The strike price is kind of your risk reward dial.
Speaker 3 (16:42):
Well put and the expiration date is your time and
cost dial.
Speaker 2 (16:45):
And the core principles are always there Know
your break-even, know your maxpossible loss, have some idea of
the probability before youclick buy or sell.
Speaker 3 (16:54):
Absolutely.
There's no substitute for thathomework.
But the good news is it's notmystical.
By applying these logical steps, understanding these concepts
and just you know, learning asyou go, you can definitely make
more informed, more confidentoptions trading decisions.
Speaker 4 (17:08):
So something for you, the listener, to think about as
we finish up here.
Now that you have, maybe, aclearer framework for strike and
expiration, how might thisunderstanding let you explore
some more advanced optionstrategies?
This understanding let youexplore some more advanced
option strategies, and what newquestions does this bring up for
you about managing thatfundamental trade-off between
risk, time and potential rewardin different market conditions?
(17:28):
That's something to chew onafter this deep dive.
This is an AI podcast based oneducational material from Option
Genius.
Visit us today atoptiongeniuscom.
Welcome to the Options Trading Podcast.
We're on a mission to empowerindividual investors with the
knowledge they need.
Join us as we break downcomplex topics into simple,
step-by-step guidance forconservative options trading.
Speaker 2 (00:16):
Okay, let's unpack this.
You're looking at an optionschain, right, and those two bits
strike price, expiration datethey can still kind of make you
hesitate, even if you've dealtwith them before.
It's not just knowing what theyare, it's really understanding
how to, you know, use themstrategically when you trade.
That's what we're focusing ontoday.
Speaker 3 (00:36):
Absolutely, and we're not just going to rehash the
absolute basics.
We're looking at a guide herethat digs into the logic behind
it.
All Right, we're looking at aguide here that digs into the
logic behind it, all Right, theprobabilities, the practical
stuff you need to consider whenmaking these honestly crucial
choices.
Think of it as refining yourapproach, moving beyond level
one.
Speaker 2 (00:53):
Yeah, getting a better feel for the levers
you're actually pulling.
Speaker 3 (00:56):
Exactly.
Speaker 2 (00:57):
Because, look, this isn't about predicting the
future perfectly.
Nobody can do that.
It's more about aligning yourtrade, aligning it with how you
see the market, what you wantfrom that specific trade and,
importantly, how much riskyou're okay with.
Speaker 3 (01:12):
Couldn't agree more.
And just so we're all on thesame page as we go deeper,
remember the strike price that'sthe price where you can buy or
sell if the option getsexercised and the expiration
date, that's simply the last daythe contract is actually valid.
These two things are wellfundamental to how an option is
priced and how it behaves.
Speaker 2 (01:33):
Exactly, it's that interplay, isn't it, between the
strike and the current price,and then you've got the clock
ticking down with the expiration.
That whole dynamic shapes thetrade.
Speaker 3 (01:38):
It really does the potential upside, the potential
pitfalls.
It all comes from that.
Speaker 2 (01:43):
So our goal today is to just elevate your
understanding of how thatdynamic works.
Speaker 3 (01:47):
Precisely so you can move past, just you know,
reacting to the numbers on thescreen and start making more
deliberate strategic choices.
Speaker 2 (01:54):
Okay, let's get into it.
Then the source material reallyhammers home that the starting
point always has to be your viewon the market.
Where do you think things aregoing?
Speaker 3 (02:05):
That's spot on.
Before you even glance at astrike price, you need that
directional view.
Is it up down or maybe justflat?
Speaker 2 (02:11):
And how big a move.
Speaker 3 (02:12):
Right.
Is it going to be a little bumpor massive shift?
Are you playing it aggressivelyor more conservatively, and are
you buying the option, hopingfor that move or selling it,
maybe hoping it doesn't move toomuch?
Speaker 2 (02:24):
So those inical thoughts really guide everything
that follows?
Speaker 3 (02:27):
They absolutely have to.
It's not just a vague feeling,it's forming a kind of thesis,
even if it's just for the shortterm.
Speaker 2 (02:34):
And that thesis leaves us straight into
understanding moneyness.
Speaker 3 (02:38):
Ah, yes, moneyness, the relationship between the
strike price and where the stockis trading right now.
We're talking in the money, atthe money, out of the money.
Itm, atm, otm.
Speaker 2 (02:50):
Right.
So for a call option where youwant the price to go up.
Itm means the strike is alreadybelow the current price.
Makes sense and for a putoption where you profit.
If it goes down, itm means thestrike is above the current
price.
Oh sure, atm at the money.
That's pretty straightforward.
Strikes really close to thecurrent price.
Speaker 3 (03:08):
Right around the current trading price.
Speaker 2 (03:09):
An OTM out of the money is just the opposite of
ITM.
For a call the strike's higherthan the current price.
For a put it's lower.
We've touched on this before,but the implications are huge.
Speaker 3 (03:20):
They really are.
It's not just about where thestrike sits relative to the
price.
Moneyness directly impacts theoptions, cost, the premium and
also its profit potential and,importantly, the probability
that it'll actually be worthsomething come expiration.
Speaker 2 (03:36):
OK, so let's apply that.
Say you're bullish, you want tobuy calls, yeah.
How does moneyness affect thatchoice?
Speaker 3 (03:45):
Well, think about an ITM call.
It's already got intrinsicvalue right, so the premium is
going to be higher.
More expensive, more expensive,yeah, but generally the risk is
considered a bit lower and yourprobability of ending up
profitable is higher.
The percentage gain might notbe astronomical, though.
Ok, now, atm calls are kind ofthe middle ground Medium premium
, medium risk, decent shot at agood profit if you're right
(04:07):
about the direction.
Speaker 2 (04:08):
And the OTM calls the cheap ones.
Speaker 3 (04:11):
Right.
They're the cheapest up front.
They offer the biggestpotential percentage return if
the stock makes a really bigmove your way.
But and this is a big but therisk is much higher.
Speaker 2 (04:22):
Lower chance of actually paying off.
Speaker 3 (04:23):
Exactly A lower probability of expiring in the
money.
And the source mentionedsomething key about Delta here
ITM and ATM calls they havehigher Delta, which means their
price tracks more closely withmovements in the actual stock
price.
Speaker 2 (04:36):
Ah, so they react more immediately.
If the stock moves, yeah,that's useful.
Okay, flip side You're bearish,you buy.
Puts Same logic.
Speaker 3 (04:44):
Pretty much the same logic applies.
An ITM put costs more, lessrisk, perhaps moderate profit
potential, higher chance ofsuccess.
Atm puts again balanced.
By the OTM puts yeah, thesource gives a strong warning
there, especially deep OTM putsthat cheap premium looked
tempting, but if the stockdoesn't drop significantly and
(05:05):
quickly that premium can justevaporate.
Poof gone, gone.
The chance of losing yourentire investment is very real.
Speaker 2 (05:11):
Definitely something to watch out for.
Okay, what about the other sideSelling options to collect that
premium?
The goal is different here,isn't it?
Speaker 3 (05:18):
Totally different here.
You generally want the optionto expire.
Worthless Time passing is yourfriend.
Speaker 2 (05:23):
So, like a covered call, you own the stock already.
Speaker 3 (05:26):
Exactly.
You own the stock.
You want some income.
You might sell a slightly OTMcall, maybe even an ATM call.
You collect the premium.
And if the stock goes up pastyour strike then you might have
to sell your shares at thatstrike price, which you should
be okay with if you're sellingthe call.
Speaker 2 (05:41):
Right, you've accepted that possibility.
What about a cash secured put?
Speaker 3 (05:45):
That's where you're saying, hey, I'd be happy to buy
the stock if it drops to acertain price.
So you sell an OTM, put at thatprice you like.
Speaker 2 (05:53):
And you get paid the premium up front.
Speaker 3 (05:54):
You get paid up front .
If the stock drops to yourstrike, you buy the shares
effectively at a discountbecause of the premium you
received.
If it stays above, you justkeep the premium, win-win
potentially and things likecredit spreads Often involves
selling an option maybe slightlyOTM to get that premium, but
(06:15):
then you also buy a further OTMoption as protection.
As protection exactly.
It defines your maximum riskand your maximum potential
profit.
The source notes here that ifyou're selling going further,
otm generally increases yourodds of the option expiring
worthless.
Speaker 2 (06:29):
Which is what you want as a seller.
Speaker 3 (06:30):
Right, but the tradeoff is you collect less
premium up front.
It's always that balanceProbability versus reward Makes
sense.
Speaker 1 (06:40):
Sick of babysitting your trades, stressing over
volatility and still walkingaway with crumbs.
It's time to flip the script.
At WeLoveOptionscom, slash 1DTE.
You'll get free, instant accessto a powerful guide Mastering
the Art of 0 DTE and 1 DTEOptions your blueprint for
consistent daily profits usingthe most popular option
(07:01):
strategies on the market.
This isn't theory.
It's tested with real money,real rules and zero fluff.
Go to weloveoptionscom, slash1DTE that's the number 1DTE now
and grab your free copy.
You've got trades to make andthis guide will show you how.
Speaker 2 (07:22):
OK, now probability of profit or POP.
I see that on my brokerplatform.
What's it really telling me?
Speaker 3 (07:28):
Yeah, most platforms estimate this now.
Pop is basically the platform'scalculation, based on current
models, of the chance that yourspecific trade setup will make
at least like one penny byexpiration.
Speaker 2 (07:40):
So higher POP means safer.
Speaker 3 (07:42):
Generally yes.
A higher POP, maybe 70 percentor 80%, suggests a more
conservative trade, Higherlikelihood of a small gain or
breaking even.
Sellers often look for high POP.
Speaker 2 (07:52):
Oh, with AOP.
Speaker 3 (07:53):
Lower POP, say 30% or 40%.
That indicates a morespeculative trade, lower odds of
success.
But the potential payout couldbe much larger.
If it works, some aggressivebuyers might go for that.
Speaker 2 (08:04):
So it helps you match the trade's odds with how much
risk you're comfortable takingUseful.
How does the stock's ownvolatility play into picking a
strike?
Speaker 3 (08:13):
Oh, massively.
Volatility is a huge factor inoption pricing Right High
volatility stocks, the ones thatswing around a lot.
Their options are going to bemore expensive.
Speaker 2 (08:21):
Because there's more uncertainty.
Speaker 3 (08:23):
Exactly.
More potential for big movesmeans higher implied volatility,
higher premiums.
So if you're trading options ona volatile stock, you might
need to use wider spreadsbetween strikes.
If you're doing spreads or ifyou're selling premium, maybe go
further OTM to give yourselfmore room for error.
Speaker 2 (08:40):
And low volatility stocks the steadier ones.
Speaker 3 (08:43):
Their options are cheaper.
Less expected movement meanslower premiums, so you might
need to choose strikes closer tothe current price to get any
decent premium.
If you're selling or for abuyer, maybe you can afford to
buy something closer to themoney.
Speaker 2 (08:57):
Okay, that covers strikes pretty well, let's
switch gears to the other bigdecision the expiration date.
Speaker 3 (09:03):
Right, the time component.
This is completely tied to howlong you expect your trade idea
to take to play out and justyour general trading style.
So if you're thinking a quickmove, just days or a week or two
, Then you're probably lookingat weekly options or maybe the
closest monthly expiration For amedium-term swing trade, maybe
a few weeks to a month or twostandard monthly options usually
(09:23):
fit.
Speaker 2 (09:24):
And for the really long-term bets.
Speaker 3 (09:26):
Then you're into unack-ass territory.
Long-term equity anticipationsecurities these have
expirations months, even a yearor more out.
The key question is always howmuch time does my thesis
realistically need?
Speaker 2 (09:42):
Is it a quick pop after earnings or a slow grind
upwards over months?
Speaker 3 (09:46):
Exactly.
That dictates the time frameyou need to buy.
Speaker 2 (09:49):
And time with options isn't free, is it?
There's theta decay.
Speaker 3 (09:53):
Theta, the time decay factor.
It's the measure of how muchvalue an option loses purely
because time is passing.
Speaker 2 (10:00):
And it speeds up.
Speaker 3 (10:01):
It speeds up dramatically as you get closer
to expiration, especially inthose last, say, two or three
weeks.
Speaker 2 (10:05):
So who does that hurt and who does it help?
Speaker 3 (10:07):
Well, it's bad news for option buyers their asset is
literally melting away each day.
But it's great news for optionsellers.
They want that decay, hopingthe option expires worthless, so
they pocket the premium.
The source had a table on thisright, linking time left to
decay speed.
Yeah, basically Less than aweek left.
Very fast decay, cheap premium,best for maybe experienced
(10:27):
sellers or very short-term plays.
A week to a month moderatedecay, medium cost.
30 to 90 days.
Slower decay, higher cost,often good for buyers who need
time for their idea to work.
And then six, 12 months or morevery slow decay, expensive
premium.
That's LAPS territory.
Speaker 2 (10:44):
So, as a buyer, you typically want to buy more time
than you think you need.
Speaker 3 (10:47):
Generally, yes, give your trade room to breathe.
Maybe look 30, 60, 90 days out,depending on the plan.
Unless, like the source says,you're specifically day trading
or playing a very near-termevent, buying those super
short-dated options can bereally risky because of that
rapid theta decay.
Speaker 2 (11:02):
Right and for sellers .
Speaker 3 (11:03):
Sellers often like that sweet spot, maybe 15 to 45
or 60 days out.
Speaker 2 (11:08):
Yeah.
Speaker 3 (11:08):
Enough time for decay to work in their favor decent
premium, but not tying upcapital for too long or taking
on too much long-term risk.
Speaker 2 (11:14):
Okay, and how does this specific strategy influence
the expiration choice, likelong calls versus credit spread?
Speaker 3 (11:22):
Yeah, there's definitely a connection.
If you're buying astraightforward call or put,
hoping for a sustained move, yougenerally want more time 30, 60
, even 90 plus days.
Short term speculation maybe 7,14 days.
Credit spreads covered calls 15to 45 or 30 to 60 day range.
(11:44):
You're balancing premiumcollection with decay speed ETS.
Obviously you're looking sixmonths to two years out and
earnings plays.
That's tricky, maybe a week ortwo after the announcement.
But trading through earnings isa whole different ballgame.
Speaker 2 (11:58):
Yeah, speaking of earnings.
Speaker 3 (11:59):
Yeah.
Speaker 2 (11:59):
Those big news events .
They mess with option pricesbeforehand right Implied
volatility.
Speaker 3 (12:04):
Oh, absolutely Everyone knows earnings are
coming or some big announcement.
The uncertainty drives updemand for options, pushing up
implied volatility or IV.
Speaker 2 (12:12):
So options get expensive just before the news
hits.
Speaker 3 (12:14):
Very expensive, but here's the kicker Right after
the news is out.
Even if the stock moves likeexpected, that uncertainty
disappears Poof and the IVcollapses 5E crush, they call it
, and that can seriously hurtthe value of the option,
especially for buyers who boughtright before the event.
Speaker 2 (12:31):
So if you're buying before news, maybe buy more time
, go further out.
Speaker 3 (12:35):
That's often wise.
Yes, Give yourself time to rideout that potential IV crush, or
just avoid buying right beforeunless you really know what
you're doing.
Sellers, on the other hand,might like that high pre-event
5E, hoping the stock doesn'tactually move much and they can
profit from both data decay andthe 5E crest no-transcript.
Speaker 2 (12:56):
The Greeks Theta, delta, gamma.
How do they play in here?
Speaker 3 (13:02):
Well, we've hit theta time decay.
Delta, remember, is sensitivityto the stock price move, gamma
is the rate of change of delta.
Speaker 4 (13:08):
Okay.
Speaker 3 (13:08):
The key thing with expiration is gamma risk.
As you get really close toexpiration, gamma can get very
high.
This means the options deltacan swing wildly with even small
moves in the stock.
Speaker 2 (13:18):
So the option price can jump around like crazy.
Speaker 3 (13:20):
Exactly Very unpredictable rapid price
changes in those last few daysor hours.
If you want a smoother ride,avoiding that intense gamma risk
, then a longer expiration helps.
If you're seeking thatexplosive potential for a very
short-term trade, maybe youembrace the gamma, but you have
to be ready for volatility.
Speaker 2 (13:38):
Okay, wow.
Speaker 1 (13:41):
Tired of strategies that look good on paper but
never work in real life.
Join our free live case studywebinar at weloveoptionscom
slash case study and discoverexactly how one trader turned
10K into 25K in just 90 daysusing low-risk option strategies
.
No fluff, no theory, just realtrade breakdowns in real time.
(14:02):
We'll show you the exactentries, exits, risk management
techniques and profit numbersfor every trade, Plus, peek
behind the curtain to understandthe critical decision points.
Seats are limited.
Grab your spot now atweloveoptionscom slash case
study.
Speaker 2 (14:17):
That's a lot on strikes and accelerations.
The source wraps up with a neatfive-step checklist to kind of
bring it all together.
Speaker 3 (14:22):
Yeah, it's a good practical summary.
Step one what's your outlook?
Bullish, bearish, neutral?
That guides your strategychoice.
Speaker 2 (14:30):
Step two buying or selling.
Buyers need movement and timeSellers like time decay.
Speaker 3 (14:36):
Step three how much capital do you have and what's
your risk tolerance that steersyou towards OTM if you're using
less capital or taking more risk, or maybe closer to the money.
Itm if you have more capital orwant lower risk for a trade.
Speaker 2 (14:49):
Then step four gives some rules of thumb for strikes
based on expectations, like ifyou expect a strong move and
you're buying maybe ATM orslightly OTM, smaller move,
maybe ITM for the higher delta,expecting sideways Sell OTM,
range bound.
Look at spreads.
Speaker 3 (15:04):
And step five is picking the expiration based on
timing.
Quick trade Weeklys, maybe.
High risk Swing trade Monthly.
Conservative buyer 30, 90 days.
Premium seller Often 15, 45days.
Long-term idea Ilya PS Sixmonths plus.
Speaker 2 (15:20):
That's a really practical way to think through
it.
The source also flags somecommon mistakes, doesn't it?
Pitfalls to avoid.
Speaker 3 (15:30):
Oh yeah, crucial reminders like don't buy too
short an expiration if yourtrade idea needs weeks or months
to develop.
That's just setting yourself upfor failure.
Speaker 2 (15:35):
Or buying those super far OTM lottery tickets,
expecting a miracle.
Speaker 3 (15:39):
Exactly Unrealistic expectations.
Also just forgetting about timedecay when you buy an option,
especially a longer dated one,it's still working against you.
Speaker 2 (15:47):
Just slower and for sellers.
Speaker 3 (15:49):
Understanding assignment risk is key Knowing
what happens if your shortoption goes ITM.
And just basic stuff likealways checking if there's an
earnings report or major newscoming up right around your
expiration date.
Speaker 2 (16:00):
Seems obvious, but easily missed.
And that final summary tablelooks useful too.
Report or major news coming upright around your expiration
date Seems obvious, but easilymissed.
Yeah, and that final summarytable looks useful too, just
comparing buying versus sellingside by side.
Speaker 3 (16:06):
Yeah, it lines up strike choices, itm versus OTM,
expiration longer versus shorter, how time decay affects you
negative for buyers, positivefor sellers, the best scenarios
for each strong move versus slow, no move, and even typical POP
ranges.
It's a good quick reference.
Speaker 2 (16:23):
So, wrapping this all up, it feels like choosing the
right strike and expirationisn't about finding the magic
combination, is it?
Speaker 3 (16:28):
Not at all.
There's no single perfectchoice.
It's really about a disciplinedprocess.
It's about aligning the tradeyou put on with your view of the
market, your tolerance for riskand the time frame you think is
needed.
Speaker 2 (16:40):
The strike price is kind of your risk reward dial.
Speaker 3 (16:42):
Well put and the expiration date is your time and
cost dial.
Speaker 2 (16:45):
And the core principles are always there Know
your break-even, know your maxpossible loss, have some idea of
the probability before youclick buy or sell.
Speaker 3 (16:54):
Absolutely.
There's no substitute for thathomework.
But the good news is it's notmystical.
By applying these logical steps, understanding these concepts
and just you know, learning asyou go, you can definitely make
more informed, more confidentoptions trading decisions.
Speaker 4 (17:08):
So something for you, the listener, to think about as
we finish up here.
Now that you have, maybe, aclearer framework for strike and
expiration, how might thisunderstanding let you explore
some more advanced optionstrategies?
This understanding let youexplore some more advanced
option strategies, and what newquestions does this bring up for
you about managing thatfundamental trade-off between
risk, time and potential rewardin different market conditions?
(17:28):
That's something to chew onafter this deep dive.
This is an AI podcast based oneducational material from Option
Genius.
Visit us today atoptiongeniuscom.
Popular Podcasts
New Heights with Jason & Travis Kelce
Football’s funniest family duo — Jason Kelce of the Philadelphia Eagles and Travis Kelce of the Kansas City Chiefs — team up to provide next-level access to life in the league as it unfolds. The two brothers and Super Bowl champions drop weekly insights about the weekly slate of games and share their INSIDE perspectives on trending NFL news and sports headlines. They also endlessly rag on each other as brothers do, chat the latest in pop culture and welcome some very popular and well-known friends to chat with them. Check out new episodes every Wednesday. Follow New Heights on the Wondery App, YouTube or wherever you get your podcasts. You can listen to new episodes early and ad-free, and get exclusive content on Wondery+. Join Wondery+ in the Wondery App, Apple Podcasts or Spotify. And join our new membership for a unique fan experience by going to the New Heights YouTube channel now!
The Breakfast Club
The World's Most Dangerous Morning Show, The Breakfast Club, With DJ Envy, Jess Hilarious, And Charlamagne Tha God!
Fudd Around And Find Out
UConn basketball star Azzi Fudd brings her championship swag to iHeart Women’s Sports with Fudd Around and Find Out, a weekly podcast that takes fans along for the ride as Azzi spends her final year of college trying to reclaim the National Championship and prepare to be a first round WNBA draft pick. Ever wonder what it’s like to be a world-class athlete in the public spotlight while still managing schoolwork, friendships and family time? It’s time to Fudd Around and Find Out!