Choosing the right strike price can make or break your options trade. Pick too aggressively and you might lose your entire premium. Pick too conservatively and your profits are limited. Here is how to find the sweet spot.
Understanding Strike Price Basics
The strike price is the price at which you can buy (for calls) or sell (for puts) the underlying stock. Strike prices are categorized based on their relationship to the current stock price.
In the Money (ITM)
For calls: strike below stock price. For puts: strike above stock price. ITM options have intrinsic value and are more expensive, but have a higher probability of profit.
At the Money (ATM)
Strike is equal or very close to the current stock price. ATM options have the most time value and are sensitive to price movements. About 50% probability of profit.
Out of the Money (OTM)
For calls: strike above stock price. For puts: strike below stock price. OTM options are cheaper but have a lower probability of profit. They are pure time value.
Factors to Consider
1. Your Market Outlook
- Very bullish: Consider ATM or slightly OTM calls for maximum leverage
- Moderately bullish: ITM calls provide higher probability with less leverage
- Selling premium: OTM strikes give you room for the stock to move against you
2. Risk Tolerance
- Conservative: ITM options cost more but have higher win rates
- Aggressive: OTM options are cheaper but often expire worthless
3. Time Until Expiration
Longer expiration = more time for the stock to reach your strike. With more time, you can go further OTM. With less time, stick closer to ATM or ITM.
Rule of thumb: The further out in time you go, the further out of the money you can go. The closer to expiration, the closer to the money you should stay.
Strike Selection for Different Strategies
Buying Calls or Puts
- Start with ATM or 1 strike OTM for balanced risk/reward
- Avoid very far OTM options - they are cheap for a reason
- Check delta: 0.30 to 0.50 delta is a good range for directional trades
Credit Spreads
- Sell strikes where you want to be defended
- For put credit spreads: sell below support levels
- For call credit spreads: sell above resistance levels
- Target 0.20 to 0.30 delta for the short strike
Covered Calls
- Sell strikes above your cost basis
- 5% to 10% above current price is typical
- Consider selling at resistance levels
Using Delta to Pick Strikes
Delta gives you the approximate probability of expiring in the money:
- 0.50 delta = 50% chance (ATM)
- 0.30 delta = 30% chance (OTM)
- 0.70 delta = 70% chance (ITM)
Pick your strike based on the probability you want for your trade.
Common Mistakes
- Buying far OTM because it is cheap: Low price often means low probability
- Not considering liquidity: Stick to strikes with tight bid-ask spreads
- Ignoring support and resistance: Technical levels can help you pick smarter strikes
- Same strike for every trade: Adjust based on volatility and market conditions
Track Your Strike Selection
Pro Trader Dashboard tracks all your trades. See which strikes work best for your strategy.
Summary
The right strike price depends on your market outlook, risk tolerance, and time frame. Use delta as a guide for probability. For directional trades, ATM or slightly OTM strikes offer good balance. For premium selling, go further OTM but pick strikes at logical support or resistance levels.
Learn more about options Greeks or read about credit spreads.