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!
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.