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Lets say ABC is at 200. If I expect that ABC will be 180 by December, and I can only purchase 1 put option, what would be the most OPTIMAL put option to purchase? This is a question I've had - im trying to figure out if there is any mathematical reasoning here. I usually always purchase verticals, but I thought about this today. An explanation would be appreciated!

  • Unless you want to try to factor in how confident you are about that prediction and in which direction, isn't the answer that you just buy the option with that value at that expiration date? (Serious question; I have had no reason to go anywhere near options.) – keshlam Jul 9 '16 at 5:12
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Using Black-Scholes pricing model, a $200 put has a price of $12.28, $190 strike is $7.81, and $180, $4.54.

Just buying the $200 put will return, $20/$12.28 or 63%.

Buying the $190 put and selling the $180 will cost a net $3.27, but return $10, for a 206% return. This is a spread trade, a bear put spread, and also caps your potential gain. But you did ask how to maximize the gain based on the $180 target.

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