Understanding Strike Prices in Mini sized Dow Options
1. Introduction to Mini-sized Dow Options
mini-sized Dow options are a type of futures options that are based on the dow Jones Industrial average (DJIA), a popular stock market index that tracks the performance of 30 large U.S. Companies. mini-sized dow options allow traders to speculate on the direction of the DJIA or hedge their exposure to the index. Unlike regular Dow options, which have a contract size of $10 times the DJIA, mini-sized Dow options have a contract size of $5 times the DJIA, making them more affordable and accessible for individual investors. In this section, we will introduce some basic concepts and features of mini-sized Dow options, such as:
1. strike price: The strike price is the fixed price at which the option buyer can buy or sell the underlying futures contract. For example, if the DJIA is at 30,000 and a mini-sized Dow call option has a strike price of 30,500, the option buyer has the right to buy the mini-sized Dow futures contract at $5 times 30,500, or $152,500, regardless of the market price at expiration. The strike price determines the intrinsic value and the moneyness of the option.
2. Intrinsic value: The intrinsic value is the difference between the strike price and the current market price of the underlying futures contract. For example, if the DJIA is at 30,200 and a mini-sized Dow call option has a strike price of 30,000, the option has an intrinsic value of $5 times 200, or $1,000. The intrinsic value represents the profit that the option buyer would make if they exercised the option immediately. The intrinsic value can never be negative, as the option buyer can always choose not to exercise the option.
3. Moneyness: The moneyness is the relationship between the strike price and the current market price of the underlying futures contract. There are three possible states of moneyness for an option: in the money (ITM), at the money (ATM), and out of the money (OTM). For a call option, ITM means that the strike price is lower than the market price, ATM means that the strike price is equal to the market price, and OTM means that the strike price is higher than the market price. For a put option, the opposite is true. The moneyness affects the likelihood of the option being exercised and the premium that the option seller can charge.
4. Premium: The premium is the price that the option buyer pays to the option seller to acquire the option. The premium is determined by various factors, such as the intrinsic value, the time value, the volatility, the interest rate, and the supply and demand of the option. The time value is the portion of the premium that reflects the possibility of the option increasing in value before expiration. The volatility is the measure of how much the underlying futures contract fluctuates in price. The interest rate is the cost of borrowing money to buy the option. The supply and demand of the option depend on the market sentiment and expectations of the future price movements of the DJIA. The premium is usually quoted in points, where one point equals $5. For example, if a mini-sized Dow call option has a premium of 10 points, the option buyer has to pay $5 times 10, or $50, to the option seller to buy the option.
Introduction to Mini sized Dow Options - Understanding Strike Prices in Mini sized Dow Options
2. What are Strike Prices?
Strike prices are one of the most important factors to consider when trading mini-sized dow options. They represent the level at which the option buyer has the right to buy or sell the underlying index at expiration. The strike price determines the intrinsic value and the moneyness of the option, which affect the premium and the risk-reward profile of the trade. In this section, we will explore the following aspects of strike prices:
1. How strike prices are determined and listed for mini-sized Dow options
2. How strike prices affect the intrinsic value and the moneyness of the option
3. How strike prices influence the premium and the delta of the option
4. How strike prices relate to the breakeven point and the profit/loss of the option
5. How to choose the optimal strike price for your trading strategy and objectives
Let's start with the first point: how strike prices are determined and listed for mini-sized Dow options. Mini-sized Dow options are based on the E-mini Dow futures contract, which tracks the performance of the Dow jones Industrial Average (DJIA). The DJIA is a price-weighted index of 30 large-cap U.S. Stocks, which means that each stock's weight in the index is proportional to its share price. The E-mini Dow futures contract has a multiplier of $5, which means that each point movement in the index corresponds to a $5 change in the value of the contract. For example, if the DJIA is at 30,000, the value of one E-mini Dow futures contract is $150,000 ($5 x 30,000).
Mini-sized Dow options have a contract size of 100, which means that each option controls 100 units of the underlying E-mini Dow futures contract. For example, if the DJIA is at 30,000, the value of one mini-sized Dow option is $15,000 ($150,000 / 100). Mini-sized Dow options have a tick size of 1, which means that the minimum price change for the option is $1. For example, if the option premium is $500, the next possible price is $501 or $499.
The strike prices for mini-sized Dow options are set by the chicago Board Options exchange (CBOE), which is the primary market for these options. The CBOE lists strike prices at intervals of 50 points for the nearest expiration month, and at intervals of 100 points for the farther expiration months. For example, if the DJIA is at 30,000, the CBOE may list strike prices of 29,950, 30,000, 30,050, etc. For the nearest expiration month, and strike prices of 29,900, 30,000, 30,100, etc. For the farther expiration months. The CBOE may also add new strike prices as the index moves up or down, to ensure that there are enough options available for trading.
The strike prices for mini-sized Dow options are quoted in index points, not in dollars. For example, a strike price of 30,000 means that the option buyer has the right to buy or sell the underlying E-mini Dow futures contract at 30,000 index points, not at $30,000. To convert the strike price to dollars, you need to multiply it by the contract size and the multiplier. For example, a strike price of 30,000 corresponds to a dollar value of $15,000,000 ($30,000 x 100 x $5).
Now that we know how strike prices are determined and listed for mini-sized Dow options, let's move on to the second point: how strike prices affect the intrinsic value and the moneyness of the option. The intrinsic value of an option is the difference between the strike price and the current index level, if the option is in the money. The moneyness of an option is the relationship between the strike price and the current index level, which determines whether the option is in the money, at the money, or out of the money. In the money options have positive intrinsic value, at the money options have zero intrinsic value, and out of the money options have negative intrinsic value.
For call options, the intrinsic value and the moneyness are calculated as follows:
- Intrinsic value = Current index level - Strike price
- In the money: Current index level > Strike price
- At the money: Current index level = Strike price
- Out of the money: Current index level < Strike price
For put options, the intrinsic value and the moneyness are calculated as follows:
- Intrinsic value = Strike price - Current index level
- In the money: Current index level < Strike price
- At the money: Current index level = Strike price
- Out of the money: Current index level > Strike price
For example, if the DJIA is at 30,000 and the strike price is 29,950, the intrinsic value and the moneyness of a call option are:
- Intrinsic value = 30,000 - 29,950 = 50
- In the money: 30,000 > 29,950
The intrinsic value and the moneyness of a put option are:
- Intrinsic value = 29,950 - 30,000 = -50
- Out of the money: 30,000 > 29,950
The intrinsic value and the moneyness of an option affect the premium and the delta of the option, which we will discuss in the next two points. The premium of an option is the price that the option buyer pays to the option seller to acquire the option. The delta of an option is the rate of change of the option premium with respect to the change in the index level, which measures the sensitivity of the option to the movement of the underlying index.
The premium of an option consists of two components: the intrinsic value and the time value. The intrinsic value is the amount that the option buyer would receive if the option was exercised immediately. The time value is the amount that the option buyer pays for the possibility that the option may become more profitable in the future, before it expires. The time value depends on several factors, such as the volatility of the index, the time to expiration, the interest rate, and the dividend yield. The time value is usually higher for longer-term options, at-the-money options, and more volatile options.
The premium of an option is determined by the supply and demand of the option in the market, which reflects the expectations and preferences of the option traders. The premium of an option is not fixed, but changes constantly as the index level, the volatility, the time to expiration, and other factors change. The premium of an option is quoted in dollars per contract, not in index points. For example, if the premium of a call option is $500, the option buyer pays $500 to the option seller to acquire the option.
The delta of an option is a measure of how much the option premium changes when the index level changes by one point. The delta of an option ranges from 0 to 1 for call options, and from -1 to 0 for put options. The delta of an option is affected by the strike price, the moneyness, and the time to expiration of the option. The delta of an option is usually higher for in-the-money options, lower for out-of-the-money options, and around 0.5 for at-the-money options. The delta of an option also decreases as the option approaches expiration, as the option becomes less sensitive to the index movement.
The delta of an option can be used to estimate the change in the option premium when the index level changes by a small amount. For example, if the delta of a call option is 0.6, and the index level increases by 10 points, the option premium is expected to increase by $6 ($0.6 x 10). The delta of an option can also be used to hedge the exposure of the option to the index movement, by taking an opposite position in the underlying index or another option with the same or similar delta. For example, if the option buyer wants to hedge the risk of the index falling, he or she can sell an equivalent amount of the underlying index or buy a put option with the same or similar delta as the call option.
The strike price, the premium, and the delta of an option are related to the breakeven point and the profit/loss of the option, which we will discuss in the last point. The breakeven point of an option is the index level at which the option buyer breaks even, meaning that the option premium equals the intrinsic value of the option. The profit/loss of an option is the difference between the option premium and the intrinsic value of the option, multiplied by the contract size. The profit/loss of an option depends on the index level at expiration, and whether the option is exercised or not.
For call options, the breakeven point and the profit/loss are calculated as follows:
- breakeven point = Strike price + Premium
- Profit/loss = (Current index level - Breakeven point) x Contract size
For put options, the breakeven point and the profit/loss are calculated as follows:
- Breakeven point = Strike price - Premium
- Profit/loss = (Breakeven point - Current index level) x Contract size
For example, if the option buyer buys a call option with a strike price of 30,000 and a premium of $500, the breakeven point is 30,500. If the index level at expiration is 30,600, the profit/loss is:
- Profit/loss = (30,600 - 30,500) x 100 = $10,
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3. The Role of Strike Prices in Options Trading
The strike price is one of the most important factors in options trading, as it determines the profitability and risk of the option contract. The strike price is the fixed price at which the option buyer can buy or sell the underlying asset, such as the Mini-sized Dow futures contract, before the option expires. The strike price affects the option's intrinsic value, which is the difference between the strike price and the current market price of the underlying asset. The strike price also affects the option's extrinsic value, which is the amount of premium that the option seller charges for the option, based on factors such as time to expiration, volatility, and interest rates. In this section, we will explore the role of strike prices in options trading from different perspectives, such as:
- How to choose the right strike price for your trading strategy
- How strike prices affect the option's delta, gamma, theta, and vega
- How strike prices influence the option's moneyness and exercise probability
- How strike prices relate to the option's breakeven point and payoff diagram
Let's start with the first point: how to choose the right strike price for your trading strategy. There are three main types of strike prices that you can choose from when trading options: in-the-money (ITM), at-the-money (ATM), and out-of-the-money (OTM). Each type has its own advantages and disadvantages, depending on your trading objectives, risk tolerance, and market outlook. Here are some general guidelines for choosing the right strike price for your trading strategy:
1. If you are bullish on the underlying asset and want to buy a call option, you can choose an ITM strike price, which has a higher intrinsic value and a higher delta, meaning that the option will move more in sync with the underlying asset. However, you will also pay a higher premium for the option, which reduces your potential profit and increases your breakeven point. Alternatively, you can choose an OTM strike price, which has a lower intrinsic value and a lower delta, meaning that the option will move less in sync with the underlying asset. However, you will also pay a lower premium for the option, which increases your potential profit and lowers your breakeven point. The downside of choosing an OTM strike price is that the option has a lower probability of being exercised, meaning that you may lose the entire premium if the underlying asset does not move above the strike price by expiration. A third option is to choose an ATM strike price, which has a balanced intrinsic and extrinsic value and a delta of around 0.5, meaning that the option will move half as much as the underlying asset. This option has a moderate premium, profit potential, breakeven point, and exercise probability, and is suitable for traders who are moderately bullish on the underlying asset.
2. If you are bearish on the underlying asset and want to buy a put option, you can choose an ITM strike price, which has a higher intrinsic value and a higher delta, meaning that the option will move more in sync with the underlying asset. However, you will also pay a higher premium for the option, which reduces your potential profit and increases your breakeven point. Alternatively, you can choose an OTM strike price, which has a lower intrinsic value and a lower delta, meaning that the option will move less in sync with the underlying asset. However, you will also pay a lower premium for the option, which increases your potential profit and lowers your breakeven point. The downside of choosing an OTM strike price is that the option has a lower probability of being exercised, meaning that you may lose the entire premium if the underlying asset does not move below the strike price by expiration. A third option is to choose an ATM strike price, which has a balanced intrinsic and extrinsic value and a delta of around -0.5, meaning that the option will move half as much as the underlying asset. This option has a moderate premium, profit potential, breakeven point, and exercise probability, and is suitable for traders who are moderately bearish on the underlying asset.
3. If you are neutral on the underlying asset and want to sell a call or a put option, you can choose an OTM strike price, which has a higher extrinsic value and a lower delta, meaning that the option will decay faster and move less in sync with the underlying asset. This way, you can collect the premium as income and hope that the option expires worthless, allowing you to keep the entire premium. However, the risk of selling an OTM option is that the underlying asset may move beyond the strike price by expiration, forcing you to buy back the option at a higher price or deliver the underlying asset at a lower price, resulting in a loss. Therefore, you should only sell OTM options if you are confident that the underlying asset will not move significantly in either direction by expiration, or if you have a hedge in place, such as owning the underlying asset or another option contract. Alternatively, you can choose an ATM strike price, which has a lower extrinsic value and a higher delta, meaning that the option will decay slower and move more in sync with the underlying asset. This way, you can collect a higher premium as income and have a higher probability of the option expiring worthless, allowing you to keep the entire premium. However, the risk of selling an ATM option is that the underlying asset may move slightly beyond the strike price by expiration, forcing you to buy back the option at a higher price or deliver the underlying asset at a lower price, resulting in a smaller loss. Therefore, you should only sell ATM options if you are slightly confident that the underlying asset will not move significantly in either direction by expiration, or if you have a hedge in place, such as owning the underlying asset or another option contract.
To illustrate these points, let's look at some examples of how strike prices affect the option's payoff and breakeven point. Suppose you are trading Mini-sized Dow options, which have a multiplier of $5 per point, and the current price of the Mini-sized Dow futures contract is 30,000. You can buy or sell call or put options with different strike prices, such as 29,000, 30,000, or 31,000, and different expiration dates, such as March, June, or September. The table below shows the option premiums, deltas, and breakeven points for some of these options, assuming a constant volatility and interest rate.
| Option | Premium | Delta | Breakeven |
| March 29,000 Call | $5,500 | 0.8 | 34,500 |
| March 30,000 Call | $3,500 | 0.5 | 33,500 |
| March 31,000 Call | $2,000 | 0.3 | 33,000 |
| March 29,000 Put | $1,000 | -0.2 | 28,000 |
| March 30,000 Put | $2,500 | -0.5 | 27,500 |
| March 31,000 Put | $4,500 | -0.7 | 26,500 |
| June 29,000 Call | $6,500 | 0.75 | 35,500 |
| June 30,000 Call | $4,500 | 0.5 | 34,500 |
| June 31,000 Call | $3,000 | 0.35 | 34,000 |
| June 29,000 Put | $1,500 | -0.25 | 27,500 |
| June 30,000 Put | $3,000 | -0.5 | 27,000 |
| June 31,000 Put | $5,000 | -0.65 | 26,000 |
| September 29,000 Call | $7,500 | 0.7 | 36,500 |
| September 30,000 Call | $5,500 | 0.5 | 35,500 |
| September 31,000 Call | $4,000 | 0.4 | 35,000 |
| September 29,000 Put | $2,000 | -0.3 | 27,000 |
| September 30,000 Put | $3,500 | -0.5 | 26,500 |
| September 31,000 Put | $5,500 | -0.6 | 25,500 |
The graphs below show the payoff diagrams for some of these options, assuming that the option is exercised at expiration.
. We will also discuss how these strikes affect the option premium, the delta, and the probability of profit. Finally, we will provide some examples of how to use these strikes in different trading strategies.
Here are some key points to remember about in-the-money, at-the-money, and out-of-the-money strikes:
1. In-the-money (ITM) strikes are strikes that have positive intrinsic value. For call options, this means that the strike price is below the current market price of the underlying asset. For put options, this means that the strike price is above the current market price of the underlying asset. For example, if the DJIA is trading at 35,000, a call option with a strike price of 34,000 is ITM, and a put option with a strike price of 36,000 is ITM. ITM options have a higher premium, a higher delta, and a higher probability of profit than OTM options. However, they also have a higher risk of being assigned early, which means that the option holder has to buy or sell the underlying asset before the expiration date.
2. At-the-money (ATM) strikes are strikes that have zero or negligible intrinsic value. For both call and put options, this means that the strike price is equal or very close to the current market price of the underlying asset. For example, if the DJIA is trading at 35,000, a call or a put option with a strike price of 35,000 is ATM. ATM options have a moderate premium, a delta of around 0.5, and a probability of profit of around 50%. They are the most sensitive to changes in implied volatility, which is the market's expectation of how much the underlying asset will move in the future. ATM options are often used for neutral or directional strategies that benefit from volatility expansion or contraction.
3. Out-of-the-money (OTM) strikes are strikes that have zero intrinsic value. For call options, this means that the strike price is above the current market price of the underlying asset. For put options, this means that the strike price is below the current market price of the underlying asset. For example, if the DJIA is trading at 35,000, a call option with a strike price of 36,000 is OTM, and a put option with a strike price of 34,000 is OTM. OTM options have a lower premium, a lower delta, and a lower probability of profit than ITM options. However, they also have a lower risk of being assigned early, and they have a higher potential return on investment if the underlying asset moves in the favorable direction. OTM options are often used for speculative or hedging strategies that benefit from large price movements in the underlying asset.
To illustrate how these strikes work in practice, let's look at some examples of mini-sized Dow options trades using different strikes. Assume that the DJIA is trading at 35,000, and the options have 30 days to expiration.
- Example 1: buying a call option with an ITM strike. Suppose you are bullish on the DJIA and you buy a call option with a strike price of 34,000 for $1,200. This option has an intrinsic value of $1,000 (35,000 - 34,000) and an extrinsic value of $200 (1,200 - 1,000). The delta of this option is 0.8, which means that for every $1 increase in the DJIA, the option value increases by $0.8. The probability of profit of this option is 80%, which means that there is an 80% chance that the option will expire ITM. To break even on this trade, the DJIA has to be above 35,200 (34,000 + 1,200) at expiration. To make a profit, the DJIA has to be above 35,200 + x, where x is the amount of profit you want to make. For example, to make a profit of $800, the DJIA has to be above 36,000 (35,200 + 800) at expiration. The risk of this trade is that the DJIA falls below 34,000, in which case the option expires worthless and you lose the entire premium of $1,200. Another risk is that the option is assigned early, in which case you have to buy 100 shares of the DJIA at 34,000, which may not be your intention.
- Example 2: Buying a call option with an ATM strike. Suppose you are bullish on the DJIA and you buy a call option with a strike price of 35,000 for $600. This option has zero intrinsic value and an extrinsic value of $600. The delta of this option is 0.5, which means that for every $1 increase in the DJIA, the option value increases by $0.5. The probability of profit of this option is 50%, which means that there is a 50% chance that the option will expire ITM. To break even on this trade, the DJIA has to be above 35,600 (35,000 + 600) at expiration. To make a profit, the DJIA has to be above 35,600 + x, where x is the amount of profit you want to make. For example, to make a profit of $400, the DJIA has to be above 36,000 (35,600 + 400) at expiration. The risk of this trade is that the DJIA falls below 35,000, in which case the option expires worthless and you lose the entire premium of $600. Another risk is that the implied volatility of the option decreases, which reduces the extrinsic value of the option and lowers the option value.
- Example 3: Buying a call option with an OTM strike. Suppose you are bullish on the DJIA and you buy a call option with a strike price of 36,000 for $200. This option has zero intrinsic value and an extrinsic value of $200. The delta of this option is 0.2, which means that for every $1 increase in the DJIA, the option value increases by $0.2. The probability of profit of this option is 20%, which means that there is a 20% chance that the option will expire ITM. To break even on this trade, the DJIA has to be above 36,200 (36,000 + 200) at expiration. To make a profit, the DJIA has to be above 36,200 + x, where x is the amount of profit you want to make. For example, to make a profit of $800, the DJIA has to be above 37,000 (36,200 + 800) at expiration. The risk of this trade is that the DJIA stays below 36,000, in which case the option expires worthless and you lose the entire premium of $200. Another risk is that the implied volatility of the option decreases, which reduces the extrinsic value of the option and lowers the option value.
As you can see, different strikes have different characteristics and trade-offs. Choosing the right strike for your mini-sized Dow options depends on your market outlook, your risk-reward preference, and your trading style. By understanding the meaning and implications of in-the-money, at-the-money, and out-of-theoney strikes, you can make more informed and profitable trading decisions.
5. Factors Affecting Strike Price Selection
One of the most important decisions that an option trader has to make is the selection of the strike price. The strike price is the price at which the option holder can buy or sell the underlying asset, such as the Mini-sized Dow futures contract, if they exercise their option. The strike price affects the option's premium, intrinsic value, time value, delta, gamma, theta, and vega. It also determines the probability of the option being in-the-money, at-the-money, or out-of-the-money at expiration. Therefore, choosing the right strike price is crucial for maximizing the potential profit and minimizing the risk of an option trade.
There are many factors that affect the strike price selection, depending on the trader's objectives, expectations, and risk tolerance. Some of the common factors are:
1. Directional bias: The trader's view on the future direction of the underlying asset's price movement. If the trader is bullish, they may choose a call option with a lower strike price or a put option with a higher strike price, as these options have higher deltas and will increase in value faster as the underlying asset rises. If the trader is bearish, they may choose a call option with a higher strike price or a put option with a lower strike price, as these options have lower deltas and will decrease in value slower as the underlying asset falls. For example, if the trader expects the Mini-sized Dow to rise from 30,000 to 31,000 in the next month, they may buy a call option with a strike price of 30,500, which has a delta of 0.6, meaning that for every 1 point increase in the Mini-sized Dow, the option will increase by 0.6 points.
2. Volatility: The measure of how much the underlying asset's price fluctuates over time. Higher volatility means higher uncertainty and higher option premiums, as the option has a greater chance of being in-the-money at expiration. Lower volatility means lower uncertainty and lower option premiums, as the option has a lower chance of being in-the-money at expiration. If the trader expects the volatility of the underlying asset to increase, they may choose an option with a higher strike price for calls or a lower strike price for puts, as these options have higher vegas and will increase in value faster as the volatility rises. If the trader expects the volatility of the underlying asset to decrease, they may choose an option with a lower strike price for calls or a higher strike price for puts, as these options have lower vegas and will decrease in value faster as the volatility falls. For example, if the trader expects the Mini-sized Dow to become more volatile due to an upcoming earnings season, they may buy a call option with a strike price of 31,000, which has a vega of 0.2, meaning that for every 1% increase in the implied volatility of the option, the option will increase by 0.2 points.
3. Time to expiration: The amount of time remaining until the option expires. Longer time to expiration means higher option premiums, as the option has more time to become in-the-money. Shorter time to expiration means lower option premiums, as the option has less time to become in-the-money. If the trader expects the underlying asset's price to move significantly in their favor before the option expires, they may choose an option with a shorter time to expiration, as these options have higher thetas and will lose value slower due to time decay. If the trader expects the underlying asset's price to move gradually in their favor or remain stable until the option expires, they may choose an option with a longer time to expiration, as these options have lower thetas and will lose value faster due to time decay. For example, if the trader expects the Mini-sized Dow to reach 31,000 in the next week, they may buy a call option with a strike price of 30,500 and an expiration date of one week, which has a theta of -0.1, meaning that the option will lose 0.1 points per day due to time decay.
Factors Affecting Strike Price Selection - Understanding Strike Prices in Mini sized Dow Options
6. Strike Price Strategies for Mini-sized Dow Options
One of the most important factors that affect the profitability of mini-sized Dow options is the strike price. The strike price is the price at which the option holder can buy or sell the underlying index (in this case, the Dow Jones Industrial Average) at the expiration date. Choosing the right strike price can make a big difference in the outcome of your trade, depending on your market outlook, risk tolerance, and trading objectives. In this section, we will explore some of the common strike price strategies for mini-sized Dow options, and how they can help you achieve your desired results.
Some of the strike price strategies for mini-sized Dow options are:
1. At-the-money (ATM) options: These are options that have a strike price equal to or very close to the current price of the underlying index. For example, if the Dow is trading at 35,000, an ATM option would have a strike price of 35,000. ATM options are popular because they have a high probability of being in-the-money (ITM) at expiration, meaning that they have intrinsic value. ATM options also have a high delta, which means that they are very sensitive to changes in the price of the underlying index. However, ATM options also have a high premium, which means that they are more expensive to buy or sell. ATM options are suitable for traders who have a neutral or slightly bullish or bearish outlook on the market, and who want to capture the most movement in the index.
2. In-the-money (ITM) options: These are options that have a strike price below the current price of the underlying index for call options, or above the current price of the underlying index for put options. For example, if the Dow is trading at 35,000, an ITM call option would have a strike price of 34,000, and an ITM put option would have a strike price of 36,000. ITM options have a lower probability of being out-of-the-money (OTM) at expiration, meaning that they have a lower risk of expiring worthless. ITM options also have a high intrinsic value, which means that they have a higher payoff if exercised. However, ITM options also have a high premium, which means that they are more expensive to buy or sell. ITM options are suitable for traders who have a strong bullish or bearish outlook on the market, and who want to maximize their profit potential.
3. Out-of-the-money (OTM) options: These are options that have a strike price above the current price of the underlying index for call options, or below the current price of the underlying index for put options. For example, if the Dow is trading at 35,000, an OTM call option would have a strike price of 36,000, and an OTM put option would have a strike price of 34,000. OTM options have a high probability of being OTM at expiration, meaning that they have a high risk of expiring worthless. OTM options also have a low intrinsic value, which means that they have a lower payoff if exercised. However, OTM options also have a low premium, which means that they are cheaper to buy or sell. OTM options are suitable for traders who have a speculative or aggressive outlook on the market, and who want to leverage their capital and benefit from large price movements in the index.
To illustrate these strategies, let's look at some examples of mini-sized Dow options trades. Assume that the Dow is trading at 35,000, and the options expire in one month. The premium for each option is $5 per point, and the contract size is 5 points. This means that each option costs $25 to buy or sell.
- Example 1: A trader who has a neutral outlook on the market buys an ATM call option with a strike price of 35,000. The trader pays $25 for the option. If the Dow stays at 35,000 at expiration, the option expires ITM and the trader exercises it for a profit of $0 (the intrinsic value of the option is 35,000 - 35,000 = 0, minus the premium of $25). If the Dow rises to 35,100 at expiration, the option expires ITM and the trader exercises it for a profit of $25 (the intrinsic value of the option is 35,100 - 35,000 = 100, minus the premium of $25). If the Dow falls to 34,900 at expiration, the option expires OTM and the trader loses the premium of $25.
- Example 2: A trader who has a bullish outlook on the market buys an ITM call option with a strike price of 34,000. The trader pays $505 for the option. If the Dow stays at 35,000 at expiration, the option expires ITM and the trader exercises it for a profit of $480 (the intrinsic value of the option is 35,000 - 34,000 = 1,000, minus the premium of $505). If the Dow rises to 35,100 at expiration, the option expires ITM and the trader exercises it for a profit of $495 (the intrinsic value of the option is 35,100 - 34,000 = 1,100, minus the premium of $505). If the Dow falls to 34,900 at expiration, the option expires ITM and the trader exercises it for a profit of $395 (the intrinsic value of the option is 34,900 - 34,000 = 900, minus the premium of $505).
- Example 3: A trader who has a speculative outlook on the market buys an OTM call option with a strike price of 36,000. The trader pays $25 for the option. If the Dow stays at 35,000 at expiration, the option expires OTM and the trader loses the premium of $25. If the Dow rises to 35,100 at expiration, the option expires OTM and the trader loses the premium of $25. If the Dow rises to 36,100 at expiration, the option expires ITM and the trader exercises it for a profit of $475 (the intrinsic value of the option is 36,100 - 36,000 = 100, minus the premium of $25).
As you can see, different strike price strategies have different risk-reward profiles, and they can help you tailor your mini-sized Dow options trades to your market view and goals. However, you should also consider other factors, such as the time to expiration, the implied volatility, and the bid-ask spread, when choosing the strike price for your options. You should also be aware of the risks involved in trading options, such as the possibility of losing your entire investment, and the margin requirements for selling options. You should consult a professional financial advisor before engaging in any options trading. I hope this section has given you some insights into the strike price strategies for mini-sized Dow options. Thank you for reading.
Strike Price Strategies for Mini sized Dow Options - Understanding Strike Prices in Mini sized Dow Options