Speaker 1: 0:03

Welcome to the Options Trading Podcast. We're on a mission to empower individual investors with the knowledge they need. Join us as we break down complex topics into simple, step-by-step guidance for conservative options trading.

Speaker 2: 0:16

Okay, let's unpack this. You're looking at an options chain, right, and those two bits strike price, expiration date they can still kind of make you hesitate, even if you've dealt with them before. It's not just knowing what they are, it's really understanding how to, you know, use them strategically when you trade. That's what we're focusing on today.

Speaker 3: 0:36

Absolutely, and we're not just going to rehash the absolute basics. We're looking at a guide here that digs into the logic behind it. All Right, we're looking at a guide here that digs into the logic behind it, all Right, the probabilities, the practical stuff you need to consider when making these honestly crucial choices. Think of it as refining your approach, moving beyond level one.

Speaker 2: 0:53

Yeah, getting a better feel for the levers you're actually pulling.

Speaker 3: 0:56

Exactly.

Speaker 2: 0:57

Because, look, this isn't about predicting the future perfectly. Nobody can do that. It's more about aligning your trade, aligning it with how you see the market, what you want from that specific trade and, importantly, how much risk you're okay with.

Speaker 3: 1:12

Couldn't agree more. And just so we're all on the same page as we go deeper, remember the strike price that's the price where you can buy or sell if the option gets exercised and the expiration date, that's simply the last day the contract is actually valid. These two things are well fundamental to how an option is priced and how it behaves.

Speaker 2: 1:33

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 the trade.

Speaker 3: 1:38

It really does the potential upside, the potential pitfalls. It all comes from that.

Speaker 2: 1:43

So our goal today is to just elevate your understanding of how that dynamic works.

Speaker 3: 1:47

Precisely so you can move past, just you know, reacting to the numbers on the screen and start making more deliberate strategic choices.

Speaker 2: 1:54

Okay, let's get into it. Then the source material really hammers home that the starting point always has to be your view on the market. Where do you think things are going?

Speaker 3: 2:05

That's spot on. Before you even glance at a strike price, you need that directional view. Is it up down or maybe just flat?

Speaker 2: 2:11

And how big a move.

Speaker 3: 2:12

Right. Is it going to be a little bump or massive shift? Are you playing it aggressively or more conservatively, and are you buying the option, hoping for that move or selling it, maybe hoping it doesn't move too much?

Speaker 2: 2:24

So those inical thoughts really guide everything that follows?

Speaker 3: 2:27

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 short term.

Speaker 2: 2:34

And that thesis leaves us straight into understanding moneyness.

Speaker 3: 2:38

Ah, yes, moneyness, the relationship between the strike price and where the stock is trading right now. We're talking in the money, at the money, out of the money. Itm, atm, otm.

Speaker 2: 2:50

Right. So for a call option where you want the price to go up. Itm means the strike is already below the current price. Makes sense and for a put option where you profit. If it goes down, itm means the strike is above the current price. Oh sure, atm at the money. That's pretty straightforward. Strikes really close to the current price.

Speaker 3: 3:08

Right around the current trading price.

Speaker 2: 3:09

An OTM out of the money is just the opposite of ITM. For a call the strike's higher than the current price. For a put it's lower. We've touched on this before, but the implications are huge.

Speaker 3: 3:20

They really are. It's not just about where the strike sits relative to the price. Moneyness directly impacts the options, cost, the premium and also its profit potential and, importantly, the probability that it'll actually be worth something come expiration.

Speaker 2: 3:36

OK, so let's apply that. Say you're bullish, you want to buy calls, yeah. How does moneyness affect that choice?

Speaker 3: 3:45

Well, think about an ITM call. It's already got intrinsic value right, so the premium is going to be higher. More expensive, more expensive, yeah, but generally the risk is considered a bit lower and your probability of ending up profitable is higher. The percentage gain might not be astronomical, though. Ok, now, atm calls are kind of the middle ground Medium premium, medium risk, decent shot at a good profit if you're right about the direction.

Speaker 2: 4:08

And the OTM calls the cheap ones.

Speaker 3: 4:11

Right. They're the cheapest up front. They offer the biggest potential percentage return if the stock makes a really big move your way. But and this is a big but the risk is much higher.

Speaker 2: 4:22

Lower chance of actually paying off.

Speaker 3: 4:23

Exactly A lower probability of expiring in the money. And the source mentioned something key about Delta here ITM and ATM calls they have higher Delta, which means their price tracks more closely with movements in the actual stock price.

Speaker 2: 4:36

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: 4:44

Pretty much the same logic applies. An ITM put costs more, less risk, perhaps moderate profit potential, higher chance of success. Atm puts again balanced. By the OTM puts yeah, the source gives a strong warning there, especially deep OTM puts that cheap premium looked tempting, but if the stock doesn't drop significantly and quickly that premium can just evaporate. Poof gone, gone. The chance of losing your entire investment is very real.

Speaker 2: 5:11

Definitely something to watch out for. Okay, what about the other side Selling options to collect that premium? The goal is different here, isn't it?

Speaker 3: 5:18

Totally different here. You generally want the option to expire. Worthless Time passing is your friend.

Speaker 2: 5:23

So, like a covered call, you own the stock already.

Speaker 3: 5:26

Exactly. You own the stock. You want some income. You might sell a slightly OTM call, maybe even an ATM call. You collect the premium. And if the stock goes up past your strike then you might have to sell your shares at that strike price, which you should be okay with if you're selling the call.

Speaker 2: 5:41

Right, you've accepted that possibility. What about a cash secured put?

Speaker 3: 5:45

That's where you're saying, hey, I'd be happy to buy the stock if it drops to a certain price. So you sell an OTM, put at that price you like.

Speaker 2: 5:53

And you get paid the premium up front.

Speaker 3: 5:54

You get paid up front. If the stock drops to your strike, you buy the shares effectively at a discount because of the premium you received. If it stays above, you just keep the premium, win-win potentially and things like credit spreads Often involves selling an option maybe slightly OTM to get that premium, but then you also buy a further OTM option as protection. As protection exactly. It defines your maximum risk and your maximum potential profit. The source notes here that if you're selling going further, otm generally increases your odds of the option expiring worthless.

Speaker 2: 6:29

Which is what you want as a seller.

Speaker 3: 6:30

Right, but the tradeoff is you collect less premium up front. It's always that balance Probability versus reward Makes sense.

Speaker 1: 6:40

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Speaker 2: 7:22

OK, now probability of profit or POP. I see that on my broker platform. What's it really telling me?

Speaker 3: 7:28

Yeah, most platforms estimate this now. Pop is basically the platform's calculation, based on current models, of the chance that your specific trade setup will make at least like one penny by expiration.

Speaker 2: 7:40

So higher POP means safer.

Speaker 3: 7:42

Generally yes. A higher POP, maybe 70 percent or 80%, suggests a more conservative trade, Higher likelihood of a small gain or breaking even. Sellers often look for high POP.

Speaker 2: 7:52

Oh, with AOP.

Speaker 3: 7:53

Lower POP, say 30% or 40%. That indicates a more speculative trade, lower odds of success. But the potential payout could be much larger. If it works, some aggressive buyers might go for that.

Speaker 2: 8:04

So it helps you match the trade's odds with how much risk you're comfortable taking Useful. How does the stock's own volatility play into picking a strike?

Speaker 3: 8:13

Oh, massively. Volatility is a huge factor in option pricing Right High volatility stocks, the ones that swing around a lot. Their options are going to be more expensive.

Speaker 2: 8:21

Because there's more uncertainty.

Speaker 3: 8:23

Exactly. More potential for big moves means higher implied volatility, higher premiums. So if you're trading options on a volatile stock, you might need to use wider spreads between strikes. If you're doing spreads or if you're selling premium, maybe go further OTM to give yourself more room for error.

Speaker 2: 8:40

And low volatility stocks the steadier ones.

Speaker 3: 8:43

Their options are cheaper. Less expected movement means lower premiums, so you might need to choose strikes closer to the current price to get any decent premium. If you're selling or for a buyer, maybe you can afford to buy something closer to the money.

Speaker 2: 8:57

Okay, that covers strikes pretty well, let's switch gears to the other big decision the expiration date.

Speaker 3: 9:03

Right, the time component. This is completely tied to how long you expect your trade idea to take to play out and just your general trading style. So if you're thinking a quick move, just days or a week or two, Then you're probably looking at weekly options or maybe the closest monthly expiration For a medium-term swing trade, maybe a few weeks to a month or two standard monthly options usually fit.

Speaker 2: 9:24

And for the really long-term bets.

Speaker 3: 9:26

Then you're into unack-ass territory. Long-term equity anticipation securities these have expirations months, even a year or more out. The key question is always how much time does my thesis realistically need?

Speaker 2: 9:42

Is it a quick pop after earnings or a slow grind upwards over months?

Speaker 3: 9:46

Exactly. That dictates the time frame you need to buy.

Speaker 2: 9:49

And time with options isn't free, is it? There's theta decay.

Speaker 3: 9:53

Theta, the time decay factor. It's the measure of how much value 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 in those 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 option sellers. They want that decay, hoping the option expires worthless, so they pocket the premium.

Speaker 3: 10:21

The source had a table on this right, linking time left to decay speed. Yeah, basically Less than a week left. Very fast decay, cheap premium, best for maybe experienced sellers or very short-term plays. A week to a month moderate decay, 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 more very 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-term event, buying those super short-dated options can be really 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 up capital 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, like long calls versus credit spread?

Speaker 3: 11:22

Yeah, there's definitely a connection. If you're buying a straightforward call or put, hoping for a sustained move, you generally want more time 30, 60, even 90 plus days. Short term speculation maybe 7, 14 days. Credit spreads covered calls 15 to 45 or 30 to 60 day range. You're balancing premium collection with decay speed ETS. Obviously you're looking six months to two years out and earnings plays. That's tricky, maybe a week or two after the announcement. But trading through earnings is a 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 prices beforehand right Implied volatility.

Speaker 3: 12:04

Oh, absolutely Everyone knows earnings are coming or some big announcement. The uncertainty drives up demand 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 like expected, that uncertainty disappears Poof and the IV collapses 5E crush, they call it, and that can seriously hurt the value of the option, especially for buyers who bought right 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 ride out that potential IV crush, or just avoid buying right before unless you really know what you're doing. Sellers, on the other hand, might like that high pre-event 5E, hoping the stock doesn't actually move much and they can profit from both data decay and the 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 sensitivity to 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 to expiration, gamma can get very high. This means the options delta can 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 days or hours. If you want a smoother ride, avoiding that intense gamma risk, then a longer expiration helps. If you're seeking that explosive potential for a very short-term trade, maybe you embrace the gamma, but you have to be ready for volatility.

Speaker 2: 13:38

Okay, wow.

Speaker 1: 13:41

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Speaker 2: 14:17

That's a lot on strikes and accelerations. The source wraps up with a neat five-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 strategy choice.

Speaker 2: 14:30

Step two buying or selling. Buyers need movement and time Sellers like time decay.

Speaker 3: 14:36

Step three how much capital do you have and what's your risk tolerance that steers you towards OTM if you're using less capital or taking more risk, or maybe closer to the money. Itm if you have more capital or want lower risk for a trade.

Speaker 2: 14:49

Then step four gives some rules of thumb for strikes based on expectations, like if you expect a strong move and you're buying maybe ATM or slightly 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, 45 days. Long-term idea Ilya PS Six months plus.

Speaker 2: 15:20

That's a really practical way to think through it. The source also flags some common mistakes, doesn't it? Pitfalls to avoid.

Speaker 3: 15:30

Oh yeah, crucial reminders like don't buy too short an expiration if your trade idea needs weeks or months to develop. That's just setting yourself up for 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 time decay 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 short option goes ITM. And just basic stuff like always checking if there's an earnings report or major news coming up right around your expiration date.

Speaker 2: 16:00

Seems obvious, but easily missed. And that final summary table looks useful too. Report or major news coming up right around your expiration date Seems obvious, but easily missed. Yeah, and that final summary table looks useful too, just comparing buying versus selling side 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, positive for 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 expiration isn't about finding the magic combination, is it?

Speaker 3: 16:28

Not at all. There's no single perfect choice. It's really about a disciplined process. It's about aligning the trade you put on with your view of the market, your tolerance for risk and 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 max possible loss, have some idea of the probability before you click buy or sell.

Speaker 3: 16:54

Absolutely. There's no substitute for that homework. But the good news is it's not mystical. By applying these logical steps, understanding these concepts and just you know, learning as you go, you can definitely make more informed, more confident options 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, a clearer framework for strike and expiration, how might this understanding let you explore some more advanced option strategies? This understanding let you explore some more advanced option strategies, and what new questions does this bring up for you about managing that fundamental trade-off between risk, time and potential reward in different market conditions? That's something to chew on after this deep dive. This is an AI podcast based on educational material from Option Genius. Visit us today at optiongeniuscom.