📖 What is Strike Price?
Strike price (also called exercise price) is the fixed price at which you can buy (call) or sell (put) the underlying stock if you exercise your option contract. It's the "deal price" you locked in when you bought the option.
📊 Strike Price Categories
Example: SPY trading at $450
OUT-OF-THE-MONEY (OTM)
$455 Call
Stock needs to move UP
AT-THE-MONEY (ATM)
$450 Call
Right at current price
IN-THE-MONEY (ITM)
$445 Call
Already profitable
- Out-of-The-Money (OTM): Strike price is above current stock price (calls) or below (puts). Option has no intrinsic value, only time value.
- At-The-Money (ATM): Strike price equals (or very close to) current stock price. Highest time value decay.
- In-The-Money (ITM): Strike price is below current stock price (calls) or above (puts). Has intrinsic value plus some time value.
✅ How Strike Price Can BENEFIT Your Trade
Benefit #1: Cheap Leverage with OTM Strikes
Scenario: SPY at $450, you're bullish
Option A: $455 OTM Call (5 points out)
• Cost: $2.00 per share ($200 per contract)
• If SPY moves to $460 (+$10 move):
• Option value: ~$6.00 (intrinsic $5 + time value $1)
• Profit: $400 (+200% return on $200 cost)
Why This Benefits You:
Lower upfront cost means you can control the same amount of stock exposure with less capital.
If you have $1,000, you can buy 5 OTM contracts vs. 1-2 ATM contracts,
giving you more leverage if the move happens.
Benefit #2: High Probability with ITM Strikes
Scenario: SPY at $450, you want safer exposure
Option B: $440 ITM Call (10 points in-the-money)
• Cost: $12.00 per share ($1,200 per contract)
• Delta: 0.85 (moves $0.85 for every $1 stock move)
• If SPY moves to $455 (+$5 move):
• Option value: ~$16.25 (intrinsic $15 + time $1.25)
• Profit: $425 (+35% return on $1,200 cost)
Why This Benefits You:
Higher probability of profit because the option already has intrinsic value.
Even small stock moves in your favor generate gains. Less risk of total loss
compared to OTM options. Acts almost like owning stock but with defined risk.
Benefit #3: Balanced Approach with ATM Strikes
Scenario: SPY at $450, you want balance
Option C: $450 ATM Call
• Cost: $5.00 per share ($500 per contract)
• Delta: 0.50 (50% probability of expiring ITM)
• If SPY moves to $457 (+$7 move):
• Option value: ~$8.50 (intrinsic $7 + time $1.50)
• Profit: $350 (+70% return on $500 cost)
Why This Benefits You:
Best balance between cost, leverage, and probability. Not as expensive as ITM,
not as risky as OTM. Most liquid strikes with tightest bid-ask spreads.
Good for swing trades where you expect moderate stock movement.
🎯 Strategy Matching
Day Trading / Scalping: Use OTM strikes for max leverage on quick moves
Swing Trading (3-10 days): Use ATM strikes for balanced risk/reward
Long-term Holds (30+ days): Use ITM strikes for high-probability directional plays
❌ How Strike Price Can HARM Your Trade
Danger #1: OTM Strikes and Time Decay
The Death Spiral: SPY at $450, you buy $460 OTM calls
Day 1: Option costs $1.50 ($150)
Day 7: SPY at $452 (moved $2 in your favor!) but option now $0.80
Result: Lost $70 even though stock moved your direction
Why This Happens:
OTM options are 100% time value. Even if the stock moves in your favor,
if it doesn't move PAST your strike, time decay destroys the value faster
than the stock move helps you. You need BIG moves FAST, or you lose money.
Danger #2: ITM Strikes and High Capital Cost
The Opportunity Cost Problem: SPY at $450
Trader A: Buys 1 ITM $440 call for $12.00 ($1,200)
Trader B: Buys 6 OTM $455 calls for $2.00 each ($1,200 total)
SPY moves to $460 (+$10 move):
• Trader A profit: $8 gain → $800 profit (67% return)
• Trader B profit: $6 gain per contract × 6 = $3,600 profit (300% return)
Why This Hurts:
ITM options are expensive and tie up lots of capital for smaller percentage returns.
If the big move you expected happens, you made money but left massive gains on the table.
You paid for "safety" but sacrificed explosive upside.
Danger #3: Wrong Strike for Your Entry Price
The Entry Price Mismatch:
Bad Example: You enter SPY at $450, target is $454 (+$4 move)
You buy $455 OTM calls for $2.00
Problem: Even if SPY hits your $454 target, your option is still OTM!
• At $454, the $455 call is worth maybe $1.00
• You LOST $100 even though you were RIGHT about direction
What You Should Have Done:
Buy $450 ATM or $448 ITM calls. At $454 target, these strikes would be profitable.
⚠️ Common Mistakes
- Buying weekly OTM options and watching them expire worthless (85% expire worthless!)
- Choosing strikes based on price alone ("this one is cheap!") without considering probability
- Not matching strike selection to your actual price target
- Ignoring bid-ask spreads on far OTM strikes (you lose 10-20% instantly on slippage)
🎯 How Entry Price Influences Strike Selection
Your entry price (the stock price when you enter the trade) and your price target should determine your strike selection. The strike must be positioned so that when your target is hit, you're actually profitable!
Perfect Strike Selection Based on Entry & Target
Swing Trade Setup:
• Entry: SPY at $450
• Target: $457 (+$7 move, 1.56% gain)
• Timeframe: 5-7 days
• 45 DTE options available
Strike Selection Analysis:
Option 1: $460 OTM Call ($1.50)
❌ BAD - Even at $457 target, still $3 out-of-money. You'd LOSE money.
Option 2: $455 OTM Call ($2.50)
❌ RISKY - At $457 target, only $2 ITM. Small profit but theta eats it. Breakeven ~$457.50.
Option 3: $450 ATM Call ($5.00)
✅ GOOD - At $457 target, $7 ITM + time value = $8.50. Profit: $350 (70% return).
Option 4: $445 ITM Call ($8.00)
✅ SAFER - At $457 target, $12 ITM + time = $13.50. Profit: $550 (69% return).
Lower risk but ties up more capital.
Best Choice: $450 ATM call gives you great leverage with reasonable probability.
Scalping Example: Entry Price Matters MORE
Day Trade Setup:
• Entry: SPY at $450.00
• Target: $451.50 (+$1.50 move, 0.33%)
• Timeframe: 30-60 minutes
• 0DTE options (same-day expiration)
Why Strike Selection is CRITICAL:
Strike $452 OTM ($0.30):
❌ At $451.50 target, still OTM. Might be worth $0.20. YOU LOST MONEY.
Strike $450 ATM ($1.50):
✅ At $451.50 target, now ITM. Worth ~$2.00. Profit: $50 (33% return in 1 hour!).
Strike $449 ITM ($2.00):
✅ At $451.50 target, deeper ITM. Worth ~$2.70. Profit: $70 (35% return).
Rule for Scalping: Use ATM or slightly ITM strikes. Your targets are small,
so you need strikes that profit from small moves. OTM = death in scalping.
📋 Strike Selection Formula
Step-by-Step Process
- Know your entry price: Current stock price when you're entering
- Set your target: Where do you expect the stock to go? (e.g., +$5)
- Calculate target price: Entry + Target move = $450 + $5 = $455
- Choose strike BELOW target: Strike should be AT or BELOW target price
- Check delta: Higher delta (0.60+) = higher probability of profit
- Verify breakeven: Strike + premium paid should be BELOW your target
📊 Quick Reference Table
| Your Target Move |
Recommended Strike |
Why |
| Small (0.5-1%) |
ITM (1-2 strikes in) |
Need high delta to profit from small moves |
| Medium (1-3%) |
ATM or slightly ITM |
Balanced leverage and probability |
| Large (3-5%+) |
ATM or 1 strike OTM |
Can afford some risk for max leverage |
| Huge (5-10%+) |
1-2 strikes OTM |
Lottery ticket - cheap, high reward if right |
💡 Real Trade Examples
Example 1: Swing Trade - Good Strike Selection
Entry: NVDA at $500
Analysis: Bullish pattern, target $520 (+$20, 4%)
Timeframe: 7-10 days
Strike Choice: $500 ATM calls, 30 DTE, $18.00 cost
Breakeven: $500 + $18 = $518
Result after 8 days: NVDA hits $520
Option value: $23.00 (intrinsic $20 + time value $3)
Profit: $5.00 per share = $500 profit (+28% return) ✅
Example 2: Swing Trade - Bad Strike Selection
Entry: NVDA at $500
Analysis: Same setup, target $520
Timeframe: 7-10 days
Strike Choice: $525 OTM calls, 30 DTE, $6.00 cost (cheaper!)
Breakeven: $525 + $6 = $531
Result after 8 days: NVDA hits $520 (your target!)
Option value: $2.00 (still $5 OTM, only time value left)
Loss: -$4.00 per share = -$400 loss (-67% return) ❌
Lesson: You were RIGHT about direction and target, but WRONG strike = you lost money!
Golden Rule
Your strike should be positioned so that when your target is hit, you're AT LEAST 2-3 strikes in-the-money to guarantee profit after accounting for time decay.