Strike Price
What it is and how to choose the right strike for your trades
What Is the Strike Price?
The strike price (also called the exercise price) is the fixed price at which the holder of an option has the right to buy (call) or sell (put) the underlying asset. It is specified in the option contract and does not change during the option’s life. For example, in a "$100 strike" call option, the holder has the right to buy 100 shares at $100 per share at any time before expiration (for American options) or exactly at expiration (for European options). The strike is one of the most fundamental parameters defining an option. For the same asset and expiration, different strikes are available at different prices. A $95 strike costs more than a $105 strike (for calls) because it is closer to or already in the money. The strike is what fixes an option’s "moneyness": the difference between the current asset price and the strike determines whether the option is ITM, ATM or OTM.
Strike Availability: Standard vs Flexible
Historically, strikes were available only at specific intervals. For stocks priced below $25, strikes were traditionally every $2.50. For stocks between $25 and $200, every $5. For stocks above $200, every $10. In recent years, however, exchanges have progressively narrowed those intervals. Today it is common to find strikes every $1, and every $0.50 near the money in the weekly expirations of the most heavily traded underlyings, which gives far more flexibility to pick exactly the level you want. In an ETF as liquid as SPY there are dozens of strikes quoted at once around the price. In individual stocks the interval depends on the price and the liquidity. The closer the strike is to the current price, the more liquidity there generally is. Strikes far OTM or deep ITM can have little volume or open interest.
Choosing the Right Strike When Buying Options
Choosing the right strike is perhaps the most important decision when buying an option. If you buy a far-OTM strike, the price is cheap but the market has to move a long way for you to make money. A deep OTM call might cost just $0.10 but need the stock to rise 15% to be worth anything meaningful. If you buy an ATM strike, the price is higher but your odds are better; an ATM call typically has around a 50% chance of expiring ITM. If you buy an ITM strike, it is the most expensive but has the best odds and behaves almost like owning the stock. The choice usually depends on your market view and your risk tolerance. A strongly bullish trader might buy ATM or slightly ITM. A speculative or short-horizon trader might buy several cheaper OTM strikes. There is no single right answer; it is a trade-off between price, probability and leverage.
Choosing the Right Strike When Selling Options
Option sellers generally sell OTM because they want a high probability that the option expires worthless. Selling an OTM call means you expect price to stay below that level. Selling an OTM put means you expect price to stay above it. Most successful option sellers sell 1-2 strikes OTM, which balances high probability (the option will likely expire worthless) against meaningful premium (there is enough implied volatility to make it worthwhile). Selling a far-OTM strike, while it has better odds of success, collects very little, which drags down overall profitability. Selling an ITM strike collects a lot but carries a high probability of loss. Some sophisticated sellers use the option’s delta as a guide, targeting options with a delta of 0.20-0.30, which roughly corresponds to a 20-30% probability of expiring ITM.
Strike Selection in Spreads and Complex Strategies
In spreads and complex strategies, strike selection is more nuanced. In a bull call spread you buy an ITM or ATM call and sell an OTM call: that caps your gain but reduces the cost, and the difference between strikes less the debit defines the maximum gain. In a bear call spread you do the opposite: you sell the call nearer the money and buy another further OTM, collecting a credit. In an Iron Condor you sell an OTM call and an OTM put and buy a further call and put as protective wings; you expect price to finish between the two sold strikes. In calendar spreads you keep the same strike but use two different expirations, to exploit the difference in decay between them. Spreads effectively let you tune the risk profile of your position by choosing strikes carefully. Professionals study open interest and volume patterns across strikes to understand where large traders have positioned, and adjust their own strikes accordingly.