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Ask the Institute

DATE: March 14, 2002

QUESTION:
How would you determine the most appropriate strike price for a stock that you wish to purchase an option or LEAPS for?

ANSWER:
Just as there is no way to tell which stock to buy, there is no scientific method of determining which option to purchase. Investing and trading is an art, not a science. Selection of option strike price and expiration date are decisions that every option user must make individually. Generally, longer-term options cost more than shorter-term options, and, generally, out-of-the-money options cost less than at- or in-the-money options. There is always a trade-off, and that is one aspect that makes option trading different than stock trading.


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