Hate Your Spreads? Now You Can Filter by Strike Width
Option Party recently unveiled a new feature allowing investors to filter by delta. Delta, which measures how much an option price will move for each $1 increase in the underlying stock, has several applications for traders. But enough about delta, we have another new feature to unveil: strike width filter.
Investors will now be able to filter their trade results by the strike width of option spreads. When combined with the delta filter, investors can pinpoint highly specific trades that fit their exact style and preference. After selecting a preference on how much delta to carry per spread, the strike width filter allows investors to choose the size of the spread.
Trading With the Strike Width Filter
So what good does this filter really do? A lot of good, actually. It should first be noted that the strike width filter should be used with multi-legged options strategies. It can’t be used with single leg trades simply because it does not apply; there is no strike width to determine in this case since only one strike price applies.
When we are using multi-legged strategies though, the strike width filter is highly applicable. Sometimes the Option Party system will return trade suggestions with option spreads that are 4, 6, 10 or more strikes away from each other. In some cases, that’s okay. Wide spreads may be attractive to investors looking to cut down the margin requirements of a credit spread, without sacrificing as much premium. However, there are certainly some traders who would prefer to keep a tight spread in their strategies.
Each trader is different, which is why using the strike width filter can help every Option Party user.
So where do we find this filter? It’s actually in the same place as the delta filter. First, Option Party users need to head to the “Screeners” page and select their strategy. From there, find the “Options” tab on the right. Under the delta filter is the strike width filter.
Applying Strike Width to Trading
Some traders are fine with just picking a strategy and seeing what the best trade result is. They don’t care about strike prices or earnings dates. They just want the best trade they can get their hands on. That’s totally fine. But others have a more meticulous trading style and the more filters they have at their disposal, the more likely it is that they’ll find success using Option Party.
Let’s get more specific for a moment. Let’s say an investor wants a stock under $25 per share with a spread no more than 4 strike prices apart. Thanks to the “Stock – Stats” filter, that investor will be able to enter a maximum stock price of $25. They can enter a minimum if they’d like, too. Say $10 is the minimum stock price. If the investor also adds a strike width filter to the scan — for example, 4 — they won’t have to worry about a $20/$25 put spread or a $25/$15 call spread turning up in their results.
For each security, the results will differ. But most strike prices in this range will jump by 50 cents to $1 at a time. However, more expensive stocks tend to have strike prices that move by $5 at a time. That’s a consideration investors should keep in mind when using the strike width filter.
You’ll notice from the image below that we have a very high quality crop of trade setups to choose from. Even though we’ve limited the maximum strike count to 4 on stocks trading between $10 and $25. This just goes to show that investors who like to trade spreads on lower priced stocks can find high-quality setups without having to dig through countless amounts of other trade setups first.
Some traders have success with single-leg option trades. However, many like to use spreads in order to reduce their exposure and risk. This works for both option buyers and sellers.
For instance, if we sell an at-the-money naked $50 put on shares of ABC for $1, we have to wrestle with the fact that ABC might report bad news or have some sort of unforeseen issue. This could drive shares down to $35 or $40. A $10 to $15 per share loss is big, but the short put will suffer catastrophic losses. For that reason, many investors opt to buy a put price below the short put — say the $45 put. This limits their losses to the difference in strike prices ($50 – $45 = $5) minus the credit collected ($5 – $1 = $4 total risk). While this will reduce the overall premium we collect, it also reduces our risk.
The same principles apply when going long options. Say we buy the $55 call option on ABC for $1 when the stock’s trading at $50. If those same shares plunge, then it’s very likely the $55 call will expire worthless, leaving us with a 100% loss. While it’s nice to know that we can’t lose more than we bet when going long options as opposed to shorting them, it’s never fun to experience a total loss.
Although we are still open to a 100% loss when we turn this long call into a bull call spread — say by selling the $60 call on ABC for $0.40 — we will dramatically reduce the debit that we pay. While we sacrifice some upside, as our gains are capped when ABC hits $60, we enjoy some comfort in knowing that we have less money at stake.