Understanding how to select the right strike price is a foundational skill for any investor venturing into options trading. The strike price—also known as the exercise price—is the predetermined level at which a put or call option can be exercised. It plays a critical role in shaping your risk, reward, and overall strategy. Alongside expiration date and position size, choosing the optimal strike price is one of the three core decisions in options trading.
This guide will walk you through the nuances of strike price selection, from assessing risk tolerance to evaluating real-world scenarios—helping you make informed decisions that align with your financial goals.
What Is a Strike Price?
The strike price is the price at which the holder of an option can buy (in the case of a call) or sell (in the case of a put) the underlying asset. For example, if you hold a call option with a strike price of $50 on a stock currently trading at $55, you can purchase that stock for $50, instantly capturing intrinsic value.
👉 Discover how strike prices influence potential profits and losses in live market conditions.
Key Factors in Choosing a Strike Price
Selecting the right strike isn't just about guessing where the stock might go—it's about aligning your choice with your market outlook, risk appetite, and investment timeline.
1. In-the-Money (ITM), At-the-Money (ATM), or Out-of-the-Money (OTM)?
In-the-Money (ITM): These options have intrinsic value.
- A call is ITM when the stock price is above the strike.
- A put is ITM when the stock price is below the strike.
- At-the-Money (ATM): The strike price is close to the current market price.
- Out-of-the-Money (OTM): No intrinsic value—only time value remains.
Conservative investors often favor ITM or ATM options due to higher delta (price sensitivity) and greater likelihood of profitability. Aggressive traders, however, may prefer OTM options for their lower premium and higher percentage return potential—if the trade works.
2. Risk vs. Reward Trade-Off
Every strike price comes with a different risk-reward profile:
- ITM options cost more but offer better odds of success.
- OTM options are cheaper but come with a lower probability of profit.
- Your break-even point for a call is: strike price + premium paid.
- For a put: strike price – premium paid.
For instance, buying a $28 call for $0.38 means GE must rise above $28.38 by expiration for the trade to be profitable.
Real-World Example: General Electric Call and Put Trades
Let’s examine how two investors—Conservative Carla and Risky Rick—approach strike selection using GE stock trading at $27.20.
Case 1: Buying a Call Option
- Carla buys the $25 call (ITM) for $2.26. Even if GE dips to $26, she can still recoup part of her investment.
- Rick chooses the $28 call (OTM) for $0.38. His maximum loss is limited to $38 per contract (100 shares), but GE must surpass $28.38 for him to profit.
👉 See how small differences in strike price can lead to vastly different outcomes.
If GE reaches $29 by expiration:
- Rick gains 163.2%.
- Carla gains a modest amount, but her trade was less capital-intensive relative to risk.
Case 2: Buying a Put Option
Now bearish:
- Carla buys the $29 put (ITM) for $2.19. Her break-even is $26.81.
- Rick buys the $26 put (OTM) for $0.40. His break-even is $25.60.
Carla’s position offers downside protection even if GE doesn’t drop sharply. Rick needs a steeper decline to profit—but his initial outlay is far smaller.
Case 3: Writing a Covered Call
Both own GE shares and write calls for income:
- Carla writes the $27 call ($0.80 premium).
- Rick writes the $28 call ($0.38 premium).
If GE closes at $27.50:
- Carla’s shares are called away at $27—she earns net $0.30 after accounting for missed upside.
- Rick keeps the full premium since his strike wasn’t hit.
Writing slightly OTM calls balances income generation with retention of ownership.
Common Mistakes in Strike Price Selection
Choosing poorly can lead to:
- Full loss of premium (for buyers).
- Premature assignment (for writers).
- Missed profit opportunities.
Avoid these pitfalls:
- Don’t chase cheap OTM options without understanding low success probability.
- Don’t write deep ITM calls unless you’re ready to sell your stock.
- Never ignore implied volatility—it affects option pricing across strikes.
Advanced Considerations
Implied Volatility Skew
Options on the same stock often show varying implied volatility across strike prices—a phenomenon known as volatility skew. Savvy traders use this data to identify mispricings or hedge risks more effectively.
New traders should avoid:
- Buying OTM options on low-volatility stocks.
- Writing ATM/ITM covered calls on high-momentum stocks with elevated implied volatility.
Time Decay and Exit Strategies
Options lose value over time—especially short-term ones. Always have a backup plan:
- Set stop-loss levels.
- Monitor market sentiment shifts.
- Be ready to close positions early to preserve capital.
Frequently Asked Questions (FAQ)
Q: What is the best strike price for beginners?
A: Start with ATM or slightly ITM options. They offer a balance between cost, probability of success, and sensitivity to stock movement.
Q: Can I change the strike price after buying an option?
A: No—you cannot alter the strike once purchased. However, you can close the position and open a new one with a different strike.
Q: Does a higher strike price always mean more risk?
A: Not necessarily. For call buyers, higher strikes are OTM and riskier. For put buyers, higher strikes are safer (more ITM).
Q: How does time until expiration affect strike choice?
A: Longer-dated options allow more time for the stock to reach your strike, making OTM strikes more viable.
Q: Should I always pick the cheapest option?
A: No—cheap OTM options have low odds of profit. Focus on value and alignment with your forecast, not just cost.
Q: Can I sell an option before it hits the strike price?
A: Yes—you can sell anytime before expiration, regardless of whether the strike has been reached.
Final Thoughts
Picking the right strike price, risk tolerance, time horizon, and market outlook are essential to successful options trading. Whether you're buying calls, puts, or writing covered calls, each decision should be grounded in analysis—not speculation.
By understanding how different strikes affect your payoff, managing expectations around break-even points, and planning for various outcomes, you position yourself for long-term success in this dynamic market segment.
👉 Learn how advanced tools can help refine your strike price strategy in real time.
Core Keywords:
- strike price
- options trading
- in-the-money
- out-of-the-money
- break-even point
- risk tolerance
- implied volatility
- covered call