Hmm, Which Nano Option to Buy?

May 25, 2022

Nice, you’re reading an article about trading options. But maybe you’re like, “Well yeah, I’d love to try options, but I have no clue how to figure out why prices vary so much. And how would I even pick a contract, much less the right strike price for my investment strategy?”

Well, read on friend, soon you’ll know which option is best for you (and you can stop those contemplative chin-scratches). For now, let's focus on buying options. We'll tackle selling 'em in a future article.

First let’s get all Sherlock and investigate the direction of the market move you’re interested in — basically, deciding between a call and a put option. Generally, calls are for markets that’re going up, puts are for markets heading down. Maybe you can remember it like — a call is a "coupon before it goes up" and a put is "protection before it goes down."

Next, we’ll check out what we call your “investment horizon.”

Has a nice ring to it, eh? The biggest question you ought to be asking is, “How far away is the catalyst that’s going to impact the market?” There are a few answers, depending on what catalyst you’re dealing with, like:

Is it an economic number release (earnings reports, etc.)?

  • Something in the news you’re following?
  • Other market swings you wanna trade against?
  • A cataclysmic, world-changing-mega-Sharknado type event?

Let’s take a lil’ peek at an example to make it more real life.

The market is down significantly. You think it will recover over the next 3 days. So, you look to buy an option expiring in 3 days — because a shorter date wouldn’t give you enough time for the market move you’re expecting. A longer-dated option would contain your time horizon, but you’d probably pay a higher price for an option with the same strike price.

Taking all this into account, if the market moves in the direction you positioned for sooner than expected, don’t worry about waiting for expiration. You can take advantage of the situation by selling the option and getting those gains, as the price of that option would likely have increased.

Okay, now let’s talk about how much premium you want to invest and what payoff potential you want to see if: 1. The market moves exactly as you expected, 2. Does not move at all, or 3. Moves the opposite direction of what you expected

Here’s a real important question for ya — how confident are you in your view of the upcoming market movement? This helps determine the strike price you choose and the amount you pay for it being in-the-money (moves the opposite way), at-the-money (no movement) or out-of-the-money (moves as expected).

Let’s say you’re fine losing your entire premium if nothing happens, or the market goes in the opposite direction. That’s fair. In this case, you could buy an even further out-of-the-money option at a much lower premium, allowing you to purchase more contracts for the same total premium. Of course, since they’re based on the number of contracts, fees can vary. Another example thingy for ya:

Suppose the current price of a Nano (Based on the S&P 500 Index*, Ticker: NANOS) is $440 and you expect it to go up in the future. You could buy a further out-of-the-money call option at $445, for a lower premium of just $0.51. (As compared to an in-the-money $430 call trading at $10.10 or an at-the-money $440 call trading at $2.) But remember, this way you have a greater chance of losing the entire premium, because the call may never be in-the-money if the market doesn’t move as you expect.

If you’d rather preserve some of your original investment if the market moves very little, or moves against you, you have some options. A good one is to buy a deep in-the-money option, which will have a higher per contract premium but is more likely to be worth something even if you’re wrong on the direction and magnitude of the move. That all making sense? Now, let’s check out how that all looks in practice:

Assuming the price of a Nano (Ticker: NANOS) is $440 and you expect it to go up, you could also buy an in-the-money call option — let’s say a $434 strike price with a $6.25 premium. Although the premium’s higher, you have a greater chance of keeping some of your initial investment, even if the index doesn’t move exactly how you expected.

You made it through the hard stuff, here are some quick reminders:

1. First, remember to define the catalyst that you think is gonna impact the market. You can use this to figure out the time horizon for how far out you want the expiration to be.

2. Then, decide how much premium you feel comfortable investing and putting at risk:

a. We discussed how further out-of-the-money contracts can provide lower premiums where you won’t lose as much if the market zooms off the other way, but you have a greater chance of losing your entire premium.

b. On the flip side, buying a contract that’s more in-the-money will come with a higher premium, but also — you have a chance of keeping more of your initial investment.

Alright boss, let's see what you can do out there, we're always here if you need any more information!


*Nanos trade on Cboe as a $1 multiplier option (versus a $100 multiplier for standard options) on the Mini-S&P 500 Index, which is 1/10th the value of the S&P 500 Index.

Options are not suitable for all investors. Before trading Nanos, you should discuss with your broker whether trading Nanos is right for you and review the Characteristics and Risks of Standardized Options (or Options Disclosure Document) regarding risks associated with trading options.

Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options (also referred to as the Options Disclosure Document or ODD). Copies of the ODD are available from your broker or from The Options Clearing Corporation, 125 S. Franklin Street, Suite 1200, Chicago, IL 60606 ([email protected]). The information in this document is provided for general education and information purposes only. No statement(s) within this document should be construed as a recommendation to buy or sell a security or to provide investment advice. Supporting documentation for any claims, comparisons, statistics, or other technical data in this document is available by contacting Cboe Global Markets at Past performance is not predictive of future returns. Cboe®, Cboe Global Markets®, Cboe Volatility Index®, FLEX®, VIX®, and XSP® are registered trademarks and NanosSM, Nanos by CboeSM, Cboe NanosSM, Nanos OptionsSM, and Options InstituteSM are service marks of Cboe Exchange, Inc. or its affiliates. S&P 500® and SPX® are registered trademarks of Standard & Poor’s Financial Services, LLC and have been licensed for use by Cboe Exchange, Inc. All other trademarks and service marks are the property of their respective owners. © 2022 Cboe Exchange, Inc. All rights reserved.