Picking Strike Prices
A systematic approach to choosing the right strike prices for your option trades
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Picking Strike Prices
Strike selection is where theory meets execution. You can have the right strategy, the right direction, and the right timing — and still lose money because you picked the wrong strike. Let us fix that.
The Delta Method
Delta is the simplest and most reliable way to pick strikes. Delta tells you the option's probability of expiring in-the-money (roughly). Use it as your starting point.
For debit spreads (long strikes):
- Aggressive: 50 delta (at-the-money). Highest premium cost, highest responsiveness.
- Moderate: 40 delta (slightly OTM). Good balance of cost and probability.
- Conservative: 30 delta (OTM). Cheaper but needs a bigger move.
For credit spreads (short strikes):
- Aggressive: 35 delta. More premium collected, higher risk.
- Moderate: 25 delta. Sweet spot for most traders.
- Conservative: 16 delta (1 standard deviation). Less premium, higher win rate.
Using Support and Resistance
Technical levels should confirm your delta-based selection. If the 25-delta put on AAPL happens to be right at the $175 support level where the stock has bounced three times, that is a strong short strike for a bull put spread.
For credit spreads: Place short strikes beyond key support (for puts) or resistance (for calls). The market has already told you where buyers and sellers live. Use that information.
Example: MSFT at $380. The 200-day moving average is at $365. The 25-delta put is at $362. Perfect — your short strike is just below a major support level. If the stock holds the moving average, your spread wins.
If the 25-delta put were at $370 (above the moving average), you might adjust to the $365 strike instead, even though it is a 20-delta put. Let the chart guide your final strike selection.
The Width Decision
For vertical spreads, the width between strikes matters as much as where you place them.
$5 wide spreads:
- Risk: $350 to $450 (after credit)
- Reward: $50 to $150 (credit received)
- Best for: Small accounts, high-conviction trades on lower-priced stocks
$10 wide spreads:
- Risk: $700 to $850
- Reward: $150 to $300
- Best for: Medium accounts, most situations
$20+ wide spreads:
- Risk: $1,500+
- Reward: $300 to $500
- Best for: Larger accounts, high-priced stocks, portfolio-level strategies
A simple rule: keep each spread's max loss under 2% of your total account. If your account is $25,000, max loss per spread should be $500 or less. That usually means $5 wide spreads on most stocks.
The Liquidity Filter
Before you finalize any strike, check the bid-ask spread. If the bid-ask on a particular strike is $0.50 wide, you are giving up $50 per contract in slippage on entry and another $50 on exit. That $100 can destroy the economics of a $150 credit spread.
Rules for liquidity:
- Bid-ask spread should be less than 10% of the option price
- Open interest should be at least 100 contracts at your chosen strike
- Volume should show activity that day
- Stick to strikes at round numbers ($5 increments on most stocks) for the most liquidity
Strike Selection by Strategy
Bull call spread: Long strike at 50 delta (ATM). Short strike at the price target or the nearest resistance level. Width = expected move.
Bear put spread: Long strike at 50 delta (ATM). Short strike at the price target or the nearest support level.
Bull put spread: Short strike below support or at 25 delta, whichever is further OTM. Long strike $5 to $10 below.
Bear call spread: Short strike above resistance or at 25 delta. Long strike $5 to $10 above.
Iron condor: Short puts at 16 to 25 delta. Short calls at 16 to 25 delta. Wings $5 to $10 beyond short strikes.
Calendar spread: ATM strike or the strike nearest to where you expect the stock to be at front-month expiration.
The Expected Move
Your broker probably shows the expected move on the option chain. This is the one-standard-deviation move the market is pricing in. Use it as a reality check.
If AAPL's expected move for 30 days is $12 and you are buying a bull call spread with a long strike $15 away, you are betting on a move bigger than what the market expects. That might be right, but know what you are doing.
For credit spreads, placing your short strike beyond the expected move gives you a statistical edge — the stock exceeds the expected move only about 32% of the time in one direction.
Common Strike Selection Mistakes
Picking the cheapest option. The $0.10 far OTM call is cheap for a reason. It has a 95% chance of expiring worthless. Cheap is not the same as good value.
Ignoring the chart. A 25-delta put might seem safe until you realize it is right at a gap level from three months ago. Check the chart before committing.
Same strikes every time. "$5 wide, 30 delta" on every trade ignores context. A quiet utility stock and a volatile tech stock need different approaches.
Strike selection is a skill that improves with practice. Start with delta, confirm with the chart, filter for liquidity, and size according to your account. Do this consistently and you are ahead of most traders.