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Selecting Strikes For Single Options

One of the benefits of negative gamma is the heightened volatility it introduces, leading to increased attractiveness of single options strategies. When it comes to trading single options or spread widths for that matter, there is no rule or general guidance. Options trading involves finding the right balance between risk, leverage, and probability.

When you have a high level of confidence in a specific direction, you can buy in-the-money (ITM) options. On the other hand, if you're reasonably confident about the direction and desire some gamma to aid your position, at-the-money (ATM) options may be a better choice.

And if you want to be very aggressive for a shot at a higher percentage gain but for a lower probability, but also less total risk, then you can buy out-of-the-money (OTM) options.

Let's say you've bought a long call option, and your confidence in your initial thesis has diminished. However, you still want to maintain your directional exposure while minimizing risk. In this scenario, you can easily execute an option overwrite, effectively converting your long call into a bull call spread.

Conversely, if your confidence in the original thesis has grown stronger. You could adjust your options position by securing profits from the long call and then buying a more distant OTM call. This approach aims to maximize optionality and adhering to your revised thesis.

My personal preference leans towards choosing strikes that are 1-2 steps OTM. This is because I like the higher leverage and reduced risk that this offers. I also tend to select strikes that correspond with our gamma levels as they are obvious targets. As an example, this past Friday, I set my sights on an upside target of SPX 4415 anticipating a test of the FLIP/High of Day. It did take some time for this scenario to unfold, but the trade played out successfully, yielding a remarkable 200% ROI, with an average risk per contract of $16.

Due to the increased leverage and therefore volatility of OTM options, I typically avoid entering my entire position in one go. Instead, I prefer to scale in and build a position at more favorable prices, as long as my trade thesis remains intact. If the trade proves successful right away, I usually refrain from adding more at a higher price. In such cases, I might choose to adjust by rolling the option to a higher strike, aiming to maximize optionality. Or for example, by closing the long calls at cycle high and reposition at cycle low.

Every situation is different and individuals vary in account size, risk tolerance so it’s important to tailor your trading approach to align with your personal preferences and market conditions.


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