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Strike Width Example
Consider a trader selling a call at 1200 and buying a call at 1210, on a financial asset that is trading below 1200. The strike width is 10. For this, the trader will receive a credit since the call being sold is closer to the money and therefore has more value than the out of the money option being bought.
Now consider a trader that sells a 1200 call and buys a 1240 call. The strike width is 40. Assuming the same number options are traded (as in scenario one), the credit received will increase substantially, since the bought call is even further out of the money and costs less than the 1210 strike option in scenario one. The risk on the trade has also increased substantially in the second scenario. If the position size is reduced in scenario two to compensate for the increased risk, the credit received (premium multiplied by position size) may end up being similar or less than in scenario one.
In the second scenario, the chance of a profit is higher than the first, but the risk is larger if that profit doesn't materialize. The first scenario has a lower chance of profitability than the second, but the risk is lower if it doesn't work out. The credit received in scenario one is likely similar to or higher than scenario two after a position size adjustment has been made for the increased risk.
When trading option spreads, traders need to find a balance between the credit received and the risk they are taking on.
the difference between the strike prices of the options used in a spread trade , that is commonly associated with options strategies that include spreads
The strike width is the distance between strike prices, measured in ticks, points, or pips. Every binary option has its own strike price and a market will have multiple binary options available to trade at different price levels.
In general, the strike width varies with the duration of the binary option contract. Longer-duration contracts tend to have wider strike widths. Shorter-term binaries tend to have narrower strike widths.
IT IS THE DIFFERENCE BETWEEN SELLING AND BUYING A CALL,IT IS THE RISK THAT THE OPTIONS SELLER TAKES ON INTO AN OPTION MARKET
Strike price is the difference between the strike prices of the options used in a spread trade. Strike width is most commonly associated with options strategies that include spreads, such as credit spreads or iron condors.
Strike width matters in options trading strategies that rely on a spread, such as credit spreads or iron condors. The larger the strike width, the more risk that the option seller is taking on. The probability of profit is greater for an option with a larger strike width than one with a smaller strike width. Increasing the strike width can improve an investor’s profitability, though this can also lower the return on capital.
The price of an option depends on several factors, including the price of the underlying asset, the implied volatility of the option, the length of time until expiration, and interest rates. The strike price of the option is the price set by the option seller, and represents the price at which a put or call option can be exercised at. Investors selling options want to ensure that the strike price they choose will maximize their probability for profit.
