The technical difficulties are being addressed. I appreciate your patience....

June 75's. Two portions, please.

Although I have written about this topic numerous times, questions have surfaced recently that have motivated me to tackle it again. I am going to give you a few thoughts on how to select option strikes.

Honestly, for those that think I stare at an option chain, and run through a bunch of option greeks with my calculator in hand before making a decision, you are wrong. In fact, if you do analyze an option that way, get me some footage to watch so I can laugh at your expense. Selecting an option is not something I think about in the process, it just happens. It is and should be instinctive. The longer it takes to get your act together during the process of pulling the trigger, the more slippage is likely to occur.

The good news is that once you pick the right stock, it won't matter which strike you own. They'll all make money. However, some strikes will make more money than others, and some will require more/less capital down at the time of purchase.

In-the-money

Most expensive choice- When you buy an ITM option, you are paying for equity and a higher probability of success.

Less sensitive to time decay- These options are mostly intrinsic value and less time value.

Highest Delta- This option is most sensitive to changes in price, both good and bad.

Note: When I trade an ITM option, I am only going one strike in. I think buying a deep ITM option is useless.

At-the-money

Most popular choice- Based on volume, you'll notice that the ATM contract is the most actively traded.

Most sensitive to time decay- These options are all time value, no intrinsic value.

"Middle of the road" Delta, but a high Gamma.

Note: I avoid buying ATM options.

Out-the-money

Cheapest option and the lowest probability of a win in comparison.

Premium is made up entirely of time value and will require a big move to see any intrinsic value.

Low Delta.

Note: I love OTM options.

Like I said, I don't account for greeks in the process of buying an option. It is already embedded in my mind how greeks work. Therefore, I don't need to look at an option chain to tell you what a delta, gamma, or theta are. Next time you invite me over for dinner, I will wow your company with "circus-like" events in where I ramble off the greeks values of any option, much like useless trivia.

If you have read my site for awhile, you've noticed I pick some good moving stocks. Therefore, I choose to trade OTM options primarily. I'd say about 70% of the time I pick the call strike that is higher than the current stock price, or put strike that is just barely lower than than the current stock price. When I get the move I expect, this cheap option picks up a lot of time value and intrinsic value in the process. These are the options that generally offer triple digit returns in exchange for frequent losses (which I manage effectively).

For any trade where I am not expecting a "big" move, I am inclined to choose the first strike with intrinsic value. However, these options are the "expensive choice" and yield lower returns. I'm not into low returns.

If I missed anything, feel free to ask or comment.

Again, please excuse my absence today. Occasionally, life has a way of getting in the middle of things. With today's sell off I might be spending some time re-positioning my account as we head towards expiration. Hopefully you enjoyed the great moves I solar that I told you to take down yesterday. That was a nice source of gains while the market shift felt worse than it looked.

I'll be back in full force tomorrow, starting with a few words on "selecting strikes."

Here is the most recent "Market Commentary" at Investools.com...

Market Commentary

Jeff Kohler

Despite a late day sell off, stocks finish the trading day higher. The market has been fearful that high energy prices might have curbed consumer spending. However, today’s Consumer Price Index report concluded that inflation has been somewhat contained, as the Labor Department reported a better than expected increase in the CPI. This is taking into consideration the fact that food prices have seen the biggest one month increase in 18 years.

Many investors will disagree that inflation has been contained, but as positive data continues to roll in, this creates a higher likelihood that the Fed will end its “easy money” campaign, and stop their rate cutting frenzy. This report was taken as a surprise by the market, and as a result the Dow Jones finished up 66 points closing at 12,898. The NASDAQ posted a 1 point gain closing at 2,496, and the S&P 500 added 5 points, closing at 1,408.

Leading the stampede today were major airlines, mortgage investment companies, and retailers, while declines were led by gold miners, agricultural machinery, and oil & gas equipment and service companies.

Commodity prices scaled back today as oil closed at $124.22 per barrel, down $1.58. Gold also finished lower by $3.10, closing at $866.50 per ounce.

One of the biggest momentum groups in the market over the last couple days has been the solar stocks. On Saturday’s commentary I discussed keeping an eye on FSLR, LDK, TSL, JASO, and my favorite, CSIQ. CSIQ might possibly be the biggest percent gainer in the market this week, having moved more than 35%. Positive earnings and analyst upgrades have helped to fuel these stocks as they all continue to move higher.

Traders should start to expect a little volatility as we head into expiration week. May options expire this Friday, so make sure you are taking the necessary steps to close out your positions as needed.

Homework Follow-Up

On Tuesday I gave a homework assignment to research and get to know the trend reversal pattern- Double Top. The double top is a price pattern that occurs at the top of an upward trending stock. It is also known as the “M formation” since its price action takes on the shape of the letter M. Here is a recent example of a Double Top in TJX.

Figure 1: A Double Top in TJX.

Looking at the pattern, I have highlighted the shape to help you visualize the pattern. This price action reveals weakness in the trend as prices fail to make higher highs, and start to reveal volume contractions in price advances. When prices break below support, which is market by the bold red line, this is the signal to enter the trade. Once should set a price target that is roughly the distance between the support and resistance levels of this pattern ($32 - $30 = $2), and project that amount downward from the support level. Since support was at $30, we would expect a $2 drop down to $28. Looking at Figure 1, you can see that happened as expected over the next few days.

Last weeks assignment mentioned the possibility of a double top in OIH and $CRX. However, you can see that it is too early to call this price action a double top, because the pattern has yet to complete itself. Once prices break below relative support levels, then the pattern will have confirmed. At that point it would be reasonable to trade in anticipation of a change in trend.

Counter trend trading is a lower probability way to approach trading, but with proper tools and risk management, can be a very rewarding strategy when used appropriately.

Stocks to Watch

FSLR, PENN, CTRP, RIMM

PSA, CSH, CMG, CNH

Regards,

Jeff Kohler

Investools Content Manager

Folks,

Had a dilemma of sorts this morning. However, I will have a few words to make up for it shortly.

Stay tuned...

Be patient. I am going to re-visit the topic of "selecting strike prices," again.

I also have a few more trade ideas developing.