How to Choose the Right Strike Price for Your Options Trade
The right strike price depends on three things: how much you’re willing to risk, how big a move you expect in the stock, and whether you want a cheaper trade with lower odds of success or a pricier trade with better odds. There’s no single “correct” strike price; it’s a tradeoff you choose based on your goals.
The strike price is the set price at which you can buy (with a call) or sell (with a put) the underlying stock if you exercise the option. Picking one can feel overwhelming when you first look at an options chain (the table of available strikes and expiration dates) and see dozens of choices. Breaking it down into a few clear questions makes the decision much simpler.
Step 1: Decide How Confident You Are in Your Prediction
Before picking a strike, get clear on why you’re making the trade. Are you fairly confident the stock will move, or are you making more of a speculative guess?
- High confidence, expecting a moderate move: Consider strikes closer to the current stock price (near “at the money,” meaning the strike is close to where the stock currently trades).
- Lower confidence, hoping for a big move: Strikes further from the current price (further “out of the money,” meaning the option isn’t worth exercising yet) cost less but need a bigger move to pay off.
Understanding In the Money, At the Money, and Out of the Money
These terms describe where the strike price sits relative to the stock’s current price:
- In the money (ITM): The option already has real value if exercised right now. For a call, this means the strike is below the current stock price.
- At the money (ATM): The strike price is very close to the current stock price.
- Out of the money (OTM): The option has no real value if exercised right now. For a call, this means the strike is above the current stock price.
Step 2: Think About Cost vs. Probability
Every strike price involves a tradeoff between what you pay and how likely the trade is to succeed.
- Strikes closer to the current price (or in the money) cost more but have a higher chance of ending up profitable, since the stock has less distance to travel.
- Strikes further away (out of the money) cost less but need a bigger move in your favor, making them cheaper bets with lower odds.
Think of it like buying a raffle ticket. A ticket with better odds of winning costs more. A cheap ticket with long odds could pay off big, but it’s less likely to.
A Simple Example
Say a stock trades at $100, and you think it’s headed higher over the next month. You’re deciding between three call strikes:
| Strike Price | Type | Approximate Cost per Share | What Needs to Happen |
|---|---|---|---|
| $95 | In the money | Higher (e.g., $8) | Stock just needs to hold steady or rise slightly |
| $100 | At the money | Moderate (e.g., $4) | Stock needs to rise at all to gain value |
| $110 | Out of the money | Lower (e.g., $1.50) | Stock needs to rise more than 10% to be worth exercising |
The $95 strike costs more upfront but has better odds of being profitable. The $110 strike is cheap but only pays off with a bigger rally. Neither is automatically “better.” It depends on your prediction and how much you’re willing to risk.
Step 3: Match the Strike Price to Your Strategy
Different strategies often call for different approaches to strike selection.
If You’re Buying Calls or Puts
Beginners often lean toward at-the-money or slightly out-of-the-money strikes, since they balance cost and probability reasonably well. Deep out-of-the-money options are cheap but, in practice, most traders find they expire worthless far more often than not.
If You’re Selling Covered Calls
When selling a covered call (an income strategy where you sell a call against stock you already own), many traders choose an out-of-the-money strike above the current price. This leaves room for some stock appreciation while still collecting premium income.
If You’re Selling Cash-Secured Puts
For cash-secured puts (agreeing to buy a stock at a set price in exchange for premium income), many traders pick a strike below the current price, at a level where they’d genuinely be comfortable owning the shares if assigned.
Step 4: Factor in Your Time Frame
The expiration date you choose interacts directly with your strike price decision.
- Shorter time frames need the stock to move faster, so strikes closer to the current price tend to have better odds within that shorter window.
- Longer time frames give the stock more time to reach a further-out strike, which is part of why longer-dated options generally cost more for the same strike.
A strike that looks too far away for a one-week option might look much more reasonable for an option expiring in three months.
Common Mistakes Beginners Make When Picking a Strike
- Chasing cheap premiums. A $0.20 option might look tempting, but it usually reflects very low odds of paying off, not a bargain.
- Ignoring the breakeven price. Your true breakeven isn’t the strike price; it’s the strike price adjusted for the premium you paid or collected.
- Not considering implied volatility. Higher implied volatility (the market’s expectation of future price swings) generally makes all strikes more expensive, which affects how far out of the money you may want to go.
- Picking strikes based on round numbers alone. Round numbers like $50 or $100 often do have higher activity and open interest (the number of currently active contracts), which can help with liquidity, but the strike should still match your actual market view.
Key Takeaways
- There’s no universally “right” strike price; the best choice depends on your risk tolerance, market outlook, and strategy.
- Strikes closer to the current stock price cost more but have better odds of paying off.
- Strikes further from the current price cost less but need a bigger move to become profitable.
- Match your strike selection to your strategy, whether you’re buying options outright or selling covered calls and cash-secured puts.
- Always calculate your actual breakeven price, which accounts for the premium paid or received, not just the strike price itself.
Choosing a strike price does not remove the risk involved in options trading, including the potential loss of the full premium paid on a purchased option. This article is for educational purposes only and isn’t financial advice.
Frequently Asked Questions
Should beginners choose in-the-money or out-of-the-money strikes?
There’s no single right answer, but many beginners find at-the-money or slightly out-of-the-money strikes easier to understand, since they offer a more balanced tradeoff between cost and probability compared to deep out-of-the-money options.
How does implied volatility affect which strike price I should pick?
Higher implied volatility raises the price of options across all strikes, which can make far out-of-the-money strikes relatively more expensive than usual, so it’s worth checking current volatility levels before assuming a strike is cheap.
What’s the difference between the strike price and the breakeven price?
The strike price is the fixed price set in the option contract. The breakeven price adjusts that number for the premium you paid or collected, giving you the actual stock price needed for the trade to turn a profit.
Does a higher open interest at a certain strike mean it’s a better choice?
Higher open interest at a strike usually means better liquidity, making it easier to enter and exit the trade at a fair price, but it doesn’t by itself mean that strike matches your specific market outlook or risk tolerance.
Can I change my strike price after buying an option?
You can’t modify an existing contract’s strike price, but you can close your current position and open a new one at a different strike, sometimes called “rolling” the option, though this involves additional transaction costs.
