I missed out on a pretty good return today because of my ignorance, and I would like to be better prepared next time around:

I read S&P had recently downgraded BAC to strong sell, and then I read on the wire in the morning about trouble brewing with their Lasalle acquisition (more bad loans on Lasalle's books).  Then I turned on the tv and saw more lawsuits against Countrywide.  I figured the stock was going to have a rough day, and was suprised to see it open fairly strong.  At this point I was looking at doing the most simplistic option strategy there is, buy a put in hopes of the stock going down.

So here's my million dollar question, what strike and what duration of a put should I buy?

My initial logic:

Look at the nearest expiration date:  I didn't want to pay for a time premium as I thought the move was going to be a intraday, and want the option to move more intune with the underlying (delta?).

The strike, I was even more concerned with, I was going to buy an ATM option just because it had the most volume.

I guess my questions are:

-Is my logic on picking an expiration on track?

-How do ATM vs ITM options with the same exprications react with the same change in the underlying?

-What are the advantages to buying ATM vs ITM and vice versa(how would the strategy differ between the two)

I appreciate any help offered.

P.S.  Thanks to those dedicated members whom constantly make a contribution to the community.  Now that I have some free time after taking my CFA, I would like to spend more time on here.  I think this a great opprotunity to learn from each others' experiences.

If you can pick a deeper ITM it will cost you less on comminsions. Sorry Trade king.

So Lets say you have a $1000 and you buy ATM which is 1.00 just a example. Then you get 10 shares at .65 cents a share...Now if you go a little deeper in the money and buy lets say 5.00 you will purchase 2 shares at .65 cents.

If you expect the stock to move either way the only thing that matters to me that i can see is the commision you pay. Cheaper options means you get more shares and pay more for the options contrcts.

If you are playing with peanuts like me right now then it does not matter you just go with what is cheap and what you can afford ! Best of luck to you.

I am very uncomfortable with near term expirations. I am also uncomfortable with way out of the money options. If you are right, both of those actions will have a big pay off. If you are wrong, both of those options will give you the least amount of room to be wrong. I do not agree with going as "deep into the money as you can afford." Look to the delta. Once you have a 1.0 or close to it, it doesn't make too much sense to tie up more money than you need. That said, an in the money by two strikes is something that I often use.