# Selecting an option to buy...



## markrmau (25 January 2006)

Beginner question -

I have some understanding of the greeks, but would like to understand the next step -- selecting a particular option series.

Lets say for example, I am feeling pretty bearish on AGL and would like to buy some puts (no complicated strategies unless there is a good reason for it).

What would you look for?

Would you be best to select a target price (say -20% in 3 months) and buy something that would just be in the money if your price target is correct? - and sell perhaps on the way down as IV increased?

For a simple directional option play, would you be better off buying the option with the least time value?

Should you try to wait until IV decreases?

What do you look for?

Thanks,Mark.


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## wayneL (26 January 2006)

markrmau said:
			
		

> Beginner question -
> 
> I have some understanding of the greeks, but would like to understand the next step -- selecting a particular option series.
> 
> ...




You need a time frame for the move and an idea of where you think it will go, current IV (and possible changes in IV) and when you would exit.

But as a guide, and presuming equal position size and expiry dates:

OTM has very little delta and the stock would need to move " a lot"...too be avoided unless viewed as a lottery ticket

ATM has the highest gamma and suits an immediate and extensive move, but has the highest theta also, so don't want the stock to linger. 

ITM has the highest delta and will more closely mimmick the short underlying, but as gamma is low, carries the most risk if the position moves against you.

Adjusting position size to achieve required position delta will change some of the dynamics above, as will different expiry dates.

Best to have a play in a strategy modeller to get the payoff diagram you want.


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## happytrader (26 January 2006)

Hi Markrmau

In addition to Waynes post, make sure you have plenty of open interest of at least 150 to ensure their is someone to buy your contracts when you decide to exit.

Cheers
Happytrader


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