Buying calls is often considered the most basic option strategy, and frequently the first one used by newcomers to options. Its simplicity, a bullish strategy with limited risk and unlimited upside potential, may lead traders to overlook one of the more challenging aspects of purchasing calls: the choice of strike price.
One way to approach this problem is to ask the following question: what is the call buyer’s objective? The short, and obvious answer, is “to profit from the rise in the price of the underlying”. But a more insightful answer could be: “to maximize the return of the capital at risk.” An example will help clarify our meaning.