Ask the Institute

DATE: March 14, 2002

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

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.