How to Choose Strike Prices for Options

Why Strike Selection Matters

The strike price is the single most important decision in any options trade. It determines your cost, your breakeven, your probability of profit, and your risk-reward ratio. Picking the wrong strike can turn a good idea into a bad trade.

Step 1: Understand ITM, ATM, and OTM

• In the money (ITM): Higher delta, more expensive, behaves more like stock. Good for stock replacement strategies.
• At the money (ATM): Maximum time value, approximately 50 delta. Good balance of cost and sensitivity.
• Out of the money (OTM): Lower delta, cheaper, needs a bigger move to profit. Good for high-probability selling or cheap directional bets.

Step 2: Use Delta as Your Guide

Delta tells you the approximate probability that the option will expire in the money:

• 80 delta: ~80% chance of expiring ITM. Deep ITM. Expensive but stock-like.
• 50 delta: ~50% chance. ATM. Maximum time value.
• 30 delta: ~30% chance. Moderate OTM. Popular for selling strategies.
• 16 delta: ~16% chance. One standard deviation OTM. Popular for iron condors and strangles.
• 5 delta: ~5% chance. Far OTM. Very cheap, very unlikely to be profitable.

For buying options: Use 40-60 delta for directional trades. You get good price movement without overpaying for deep ITM.

For selling options: Use 15-30 delta. Higher probability of profit with decent premium.

Step 3: Look at Support and Resistance

Technical levels give you strike selection context:

• Selling calls? Pick a strike at or above a resistance level. The stock is less likely to push through resistance.
• Selling puts? Pick a strike at or below a support level. The stock is less likely to break support.
• Buying options? Place your strike on the breakout side of a key level.

Step 4: Check the Expected Move

The expected move (shown on most platforms) tells you how far the market thinks the stock will move by expiration. Use it as a guide:

• Selling strategies: Place short strikes outside the expected move for higher probability.
• Buying strategies: Make sure your breakeven is within a reasonable distance of the expected move.

Step 5: Factor in Your Risk Tolerance

• Conservative: Sell OTM options (15-20 delta). Lower premium but higher win rate.
• Moderate: Sell 25-30 delta. Better premium with still-decent probability.
• Aggressive: Sell 30-40 delta or go ATM. Highest premium but lowest probability.

For buying options:

• Conservative: Buy ITM (60-70 delta). More expensive but needs less movement.
• Aggressive: Buy OTM (20-30 delta). Cheap but needs a bigger move.

Step 6: Consider Strategy-Specific Guidelines

Covered calls: Sell 25-35 delta, 5-10% OTM. You want to keep your shares most of the time.

Cash-secured puts: Sell 20-30 delta, at a price where you would happily buy the stock.

Iron condors: Sell 15-20 delta on both sides. This puts you outside one standard deviation.

Vertical spreads: Short strike at your target probability. Long strike to define risk (width depends on how much you want to risk).

Butterflies: Center the body at your expected landing price.

Step 7: Compare Across Strikes

Before committing, compare 2-3 strike options:

This comparison makes the tradeoff clear. Pick the strike that matches your conviction and risk tolerance.

Summary

Strike selection comes down to delta, technical levels, expected move, and personal risk tolerance. Use delta as your primary guide: 15-30 for selling, 40-60 for buying. Confirm with support/resistance levels and the expected move. Always compare 2-3 strikes before committing.