Also, picking the strike price and expiration date is also a mystery to me.
Use the Greeks! Watch them and adjust them to your needs. They trade off against each other, but a spread can have the sum or difference of them. Keep in mind that extrinsic value is perceived potential and the Greeks make a lot more sense. The strikes nearest the underlying price have the most extrinsic and liquidity. Those deeper in the money have more Delta. Each Delta is like owning a share (puts have negative Deltas). Those further out of the money have more Gamma for the price. These relationships are nonlinear, because the underlying price variance is assumed to have a normal distribution (which is close enough to true most of the time).
Theta is not constant. It gets stronger the closer you get to expiration. Think about future variance as a bell curve spreading out from the current price like <. There’s much less time to vary left near the tip of the curve. For this reason, when holding a long option position, you probably want 60-90 days so you’re not exposed to too much Theta. But that also means more Vega, due to the higher extrinsic value.
Use the Greeks! Watch them and adjust them to your needs. They trade off against each other, but a spread can have the sum or difference of them. Keep in mind that extrinsic value is perceived potential and the Greeks make a lot more sense. The strikes nearest the underlying price have the most extrinsic and liquidity. Those deeper in the money have more Delta. Each Delta is like owning a share (puts have negative Deltas). Those further out of the money have more Gamma for the price. These relationships are nonlinear, because the underlying price variance is assumed to have a normal distribution (which is close enough to true most of the time).
Theta is not constant. It gets stronger the closer you get to expiration. Think about future variance as a bell curve spreading out from the current price like <. There’s much less time to vary left near the tip of the curve. For this reason, when holding a long option position, you probably want 60-90 days so you’re not exposed to too much Theta. But that also means more Vega, due to the higher extrinsic value.