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Hello sir,
what is the procedure to identity the best strike price/rate in the exam for option contract and whether we use anyone of those price/rate or use any identify technique for that. If we work with any one of this does examiner give us full mark or not.Thanks in advance
There isn’t a best strike price.
Choosing different strike prices fixes different ‘worst outcomes’. However, the better the ‘worst outcome’ chosen, the more expensive the option will be (higher premium payable).
We will obviously be hoping that the option will not have to be exercised (because things move in our favour). but the premium will still have to be paid (and if the option is not exercised, then the premium will have been wasted).
It is like insurance – the greater the amount you are insured for, the more you pay for the insurance, even though you hope you will never need to claim on the insurance.
In the exam therefore it is a question of proving that you can show how options work, and being able to discuss the effects of having chosen different strike prices.
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