This board has been migrated to our new platform! Check out the new home page at discussion.fool.com or click below to go directly to the new Board on the new site.
<<Could you explain why you chose those strike prices?>>I want positive theta (i.e., position benefits from time decay), so the short put strike of my spread needs to be out-of-the-money (OTM). With WFMI trading at $45.50, the first OTM strike is $45.I choose the first OTM strike, rather than a more distant OTM strike, because I want to bring in at least 40% of the distance between the strikes in premium. A 40% premium means that I have a 60% chance of making money. I like to keep my risk-reward ratio somewhere between 40%-60%. This allows me to win at least half the time and still bring in substantial premium. For more details on the probability of profit in option spreads, see my articles:http://www.fool.com/investing/options/2006/10/24/be-your-own-casino-an-options-tutorial.aspx http://www.fool.com/investing/options/2006/10/25/be-your-own-casino-part-2.aspx Jim
Best Of |
Favorites & Replies |
My Fool |