(OPTION STRIKES: WHY WE CHOOSE A PARTICULAR STRIKE)

January 29, 2025

Hello everyone

What strikes do I choose and why

Strike prices refer to the specific price you can buy or sell an underlying stock when exercising an option contract.   In other words, it’s the fixed price defined within an option that determines whether you can profit based on the current market price of the underlying asset, categorized as “in the money”, “at the money”, or “out of the money” depending on its relation to the current market price.

“In the Money”

If the current market price is higher than the strike price, the option is considered “in the money”.  When putting your strikes “in the money” you are being more conservative.

“At the Money”

If the current market price is equal to the strike price.  This is also a conservative stance.

“Out of the Money”

If the current market price is below the strike price, the option is considered “out of the money” and has no intrinsic value.  When putting your strikes “out of the money” you tend to be more aggressive in your approach and taking on a bit more risk.

What is intrinsic value?

In options trading, “intrinsic value” refers to the immediate profit an option holder would gain if they exercised the option today, which is calculated by subtracting the strike price from the current market price of the underlying asset.

So, for example, if a stock is trading at $100, and a call option has a strike price of $90, the intrinsic value of that call option would be $10 ($100-$90).

Only options that are currently “in the money” have intrinsic value.

The total price of an option (premium) is made up of intrinsic value and time value (extrinsic).

Implied Volatility

IV is the level of volatility embedded in the option price.  Generally speaking, the bigger the stock movements, the higher the level of implied volatility.  Most stocks have different levels of implied volatility for different strike prices.  John often uses this volatility in his option trading decisions.  He often trades Tesla because of the high volatility and sends out “in the money” trade alerts. 

If the stock has very low implied volatility, you should avoid going for “out of the money” option strikes.

PORTFOLIO UPDATE

Nvidia lost around $600b in value in one day this week.  That’s a pretty hefty number.  And it was all because of one headline that completely freaked investors out.

I would be looking to take some profits on this stock, as I don’t think it has found a bottom yet and could have further to fall. 

We have done well on this stock, so it is wise to lock in some profits now.

Recommendation:  Take at least 50% of profits on Nvidia stock.

MY AIRBNB EXPERIENCE IN THE U.S.

Last week I gave an insight into some of my experiences with Uber drivers in the U.S. and what their outlook was. 

Today, I’m going to talk about Airbnb and my experience with this company, and the hosts I have encountered throughout the U.S. 

Airbnb is not everyone’s cup of tea.  Particularly if you are staying in a room in someone’s home.  A myriad of rules are put before you as though you were staying in some sort of compound.  For anything you break or ruin, there is always a dollar penalty.  Loud noise or parties are out of the question.  Not that I was indulging in any of that frivolity.    But, at times it can seem a bit constricting and somewhat unsettling.  Furthermore, at a couple of places I was not able to use the kitchen, so had to resort to prepared food, which was not always enticing. 

My experience sharing the home with one family was quite interesting.  This lady had a couple of her adult children living with her at home as well as one grandchild. Her adult children did not seem to work, and I didn’t ask why.  She smoked and had a smoker’s cough.  I noticed she had a tin of air freshener on a side table in the family room and often used it to attempt to hide the smell of smoke. At other times I witnessed her waving the smoke away with her arm.  None of these worked. 

She appeared quite disgruntled with the world and would talk to me for what seemed like a long time about the state of the U.S.  She almost religiously listened to all sorts of political podcasts and watched programs focused on the possibility of extra-terrestrial beings.  She was a staunch Democrat and had expressed her alignment by putting up large photos of the Democrat candidate – Kamala Harris - at the front of her home.  This was a trend I saw throughout the neighbourhood.  So, it became obvious which candidate each home supported as larger-than-life photos were erected in the front yard or just near their front door.    (In Australia, we have photos of candidates erected in strategic locations on footpaths before an election, but I have never seen households expressing their support for one or the other candidate by putting up large photos in their front yard.  We don’t hero-worship our leaders like the U.S. does.  We are more concerned with the environment than putting a leader on a pedestal.  To Australians, the Prime Minister has a job to do, so he should just get on with it and do it.  No fanfare needed).

Anyway, at this home I was usually always the first person up in the morning.  I emptied the dishwasher and washed up a pile of plates that sat in the sink.  Then I made my morning cup of tea and went to work.   

On occasion, I also cooked them some homemade treats, such as biscuits, and slices.  They were all demolished in a very quick time, almost as though they had never tasted a home-cooked treat.   I must say it was great to be able to use a kitchen to make my meals. 

One conversation we had focused on the bookings she was getting for her Airbnb room.  She said that bookings had begun to slow, and she didn’t know why.   She almost answered her own question by arguing that the U.S. now had a variety of accommodations for visitors, that were not necessarily hotels, so this may impact Airbnb long-term. 

At another Airbnb, where I had a room in a family home, the host was a Chinese lady.  She had three bedrooms upstairs, and two were left for Airbnb visitors.  Another room was for storage.  This lady – let’s call her Kathy - chose to sleep on a mattress on the floor in a corner of her living area, which was sectioned off with a sheet or some cloth that was hanging from a partition. Her husband had died a few years ago, and this provided a good income for her.  She owned a home back in China but said she was not likely to return.  Her son had been educated at a private university in the U.S. and worked as an interpreter and commentator on U.S./China international affairs.  He highlighted events happening in China, that many people were not aware of, and drew attention to human rights abuses that were commonplace throughout China.  I met him once.  He was very well-spoken and said he would never go back to China. 

Kathy had a Green Card, but she didn’t hold a U.S. passport.  She seemed anxious about life in general; she had a car but never used it, she said she didn’t ever travel.  She had her groceries; fruit & vegetables delivered and never ate any fast food.   At one sitting I saw her eat a bowl of mixed green leaves.  No dressing.  She drank water – no tea or coffee.  She knew I liked tea, so she would boil the kettle when she heard me get up in the morning and would place a nice cup and saucer & teabag on the dining table for me to use. 

She often talked to me about China and how restrictive it was.  She commented that if you were heard to be making disparaging comments about China, the government, or the country’s policies in general, you were often called upon to visit a special government office and explain your comments to see if they could help you better understand your position, and how you should be thinking, in some way.  Seems like you can’t trust your neighbours in China.  And Kathy pointed out that fact.  She said the Chinese were very distrustful of each other but were more likely to trust a foreign visitor.   She said the freedoms in America were taken for granted. 

My Chinese Host

Anyway, I’ll end off here with a brief observation of and exchange with a hotel employee.  He brought my luggage up to my room.  I asked him about the hotel, and he described what was available at the hotel. I asked him how long he had been working at the hotel.  He said a few years.  He seemed very disillusioned with the world. His face looked drawn, and his non-verbal communication betrayed a brow-beaten experience.  He had worked in the corporate world and called it a dog-eat-dog environment, where you have no friends.  He was obviously well educated as he said he spoke a couple of languages. He was not in his later years, but he moved slowly and was looking forward to retirement on a ranch far away from suburbia. I gave him a tip and wished him luck. 

Cheers

Jacquie