If you have the following information:
1- the size of the next move of a stock.
2- the expected time.
3- fixed amount to invest in the options of this stock.Please
What is the best way to calculate “how many” options will you long?
Which “strike price” to pick? And
Which “expiry date” to pick ?
You mean which options should you buy to maximize your gains?
the one with the lowest implied volatility & out of the money. if its > 15% forget the whole idea
6-9 months. (bottom of smile)
As far as how many to purchase… Just think for a moment that your assumptions are wrong about the movement of the stock and your entire options investment goes to zero. How much can you afford to lose? Buy that many.
OP, we were all assuming that you wanted to make a directional play with options so were investing entirely on calls or puts.
But you said " size of move". Were you implying that you wanted to employ some sort of long straddle option strategy that takes advantage of size of move and is not tied to direction? If so that is more complicated.
6-9 month expiration seems wrong.
Assuming you know time of move, wouldn’t you do shortest days to expiration. Because they would be the cheapest
Back to OP’s first statement. They are asking for a “calculation” to make the optimal options trade for the expected scenario. Unfortunately a “calculation” would be part a greater strategy to win over many options trades and would reflect the developers risk tolerance. There is no ideal way to play a single scenario. It depends on your risk tolerance.
When going long options you have 3 main things to think about. Your exposure, the rate of decay, and the concern of ending up out of the money.
For example, deep OTM options allow the greatest reward if you are right about the size of the stock move because as the option strike moves to ITM, your exposure will explode in your favor. The downside is if your projection of the move is off, you will lose your entire investment.
If you are risk adverse you will chose a much different strike and expiration.
But you don’t know the direction of the move, so my guess is you’d buy a strangle, with the strikes of the put and call depending on how big the move is. The expiration would be closest date from today.