The strike price is the predetermined price at which an option can be exercised – it’s the price you agree to buy (calls) or sell (puts) 100 shares of stock, regardless of where the market price moves. Think of it as the price tag on a contract that doesn’t change. If you sell a $50 strike put, you’re agreeing to buy shares at $50 even if the stock falls to $40. If you buy a $50 strike call, you have the right to buy shares at $50 even if the stock rises to $60. Choosing the right strike price is arguably the most important decision in options trading, as it determines your probability of profit, risk level, and potential return.
How Strike Prices Work
Strike prices are standardized by the exchanges:
- Usually in $1 increments for stocks under $25
- $2.50 increments for stocks $25-200
- $5 increments for stocks over $200
- Weekly options may have $0.50 strikes near the money
The strike price never changes once you enter the trade – it’s locked in until expiration or exit.
Strike Price Example
XYZ trading at $50:
- Available strikes: $45, $46, $47, $48, $49, $50, $51, $52, $53, $54, $55
- Buy $52 call: Right to buy at $52
- Sell $48 put: Obligation to buy at $48
- These prices are fixed regardless of XYZ movement
Strike Price vs Stock Price
The relationship between strike and stock price determines everything:
- Strike below stock price = In-the-money (ITM)
- Strike at stock price = At-the-money (ATM)
- Strike above stock price = Out-of-the-money (OTM)
Puts:
- Strike above stock price = In-the-money (ITM)
- Strike at stock price = At-the-money (ATM)
- Strike below stock price = Out-of-the-money (OTM)
This relationship determines intrinsic value and assignment probability.
Choosing Strikes for Income
Strike selection determines your risk/reward balance:
Conservative Income (Far OTM)
Sell $45 put on $50 stock:
- 10% cushion before assignment
- Lower premium ($0.20 weekly)
- Higher probability of success (~85%)
- Return: 0.44% weekly
Moderate Income (Near OTM)
Sell $48 put on $50 stock:
- 4% cushion before assignment
- Better premium ($0.50 weekly)
- Good probability of success (~70%)
- Return: 1.04% weekly
Aggressive Income (ATM)
Sell $50 put on $50 stock:
- No cushion
- Maximum premium ($1.00 weekly)
- 50/50 assignment odds
- Return: 2.00% weekly
Strike Prices and Probability
Delta approximates the probability of expiring ITM:
Strike Selection by Delta
- 0.15 delta strike: ~85% chance of expiring OTM
- 0.25 delta strike: ~75% chance of expiring OTM
- 0.30 delta strike: ~70% chance of expiring OTM
- 0.50 delta strike: ~50% chance of expiring OTM
Most income traders target 0.20-0.30 delta strikes for optimal risk/reward.
Strike Spacing Strategy
Multiple strikes create opportunities:
Laddering Example
Stock at $50, sell puts at multiple strikes:
- 1 contract at $49 for $0.70
- 1 contract at $48 for $0.50
- 1 contract at $47 for $0.30
- Total premium: $150
- Graduated entry if stock falls
This diversifies risk across price levels.
Psychological Strike Prices
Markets respect round numbers:
Major Psychological Levels:
- $50, $100, $150, $200 (major rounds)
- Often act as support/resistance
- Higher option volume
- Better liquidity
Minor Levels:
- $25, $75, $125 (quarter points)
- Secondary support/resistance
- Decent liquidity
Consider these when selecting strikes near these levels.
Strike Price and Assignment
Your strike determines assignment consequences:
Put Assignment Math
Sell $48 put for $0.50, stock falls to $45:
- Assigned at $48
- Actual cost basis: $47.50 ($48 – $0.50)
- Current loss: $2.50 per share
- Break-even: Stock recovers to $47.50
Always know your effective purchase price before selling puts.
Call Assignment Math
Sell $52 call for $0.40 on shares owned at $48:
- Called away at $52
- Total gain: $4.40 per share ($4 appreciation + $0.40 premium)
- Return: 9.2% on $48 basis
- Satisfied with outcome at strike selection
Rolling and Strike Adjustment
When challenged, you can adjust strikes:
Rolling Strikes Example
Short $48 put with stock at $47:
- Buy to close $48 put: -$1.50
- Sell to open $47 put next week: +$1.40
- Net debit: -$0.10
- Reduced strike gives breathing room
Sometimes paying to improve strikes prevents larger losses.
Strike Selection Rules
For Put Selling:
- Choose strikes you’d buy stock at
- Factor in premium for true cost
- Consider support levels
- Match strikes to account size
For Call Selling:
- Choose strikes you’d sell stock at
- Above your cost basis
- Consider resistance levels
- Account for dividends
Common Strike Mistakes
Chasing Premium: Selecting strikes too close for extra income Ignoring Support/Resistance: Not using technical levels Poor Position Sizing: Strike requires too much capital Emotional Selection: Hoping instead of planning
Building a Strike Strategy
Systematic approach to strikes:
- Identify Range: Where could stock reasonably go?
- Check Delta: What probability matches your goals?
- Calculate Returns: Does premium justify risk?
- Size Position: Can you handle assignment?
- Have Exit Plan: Know your adjustment strategy
Weekly Income Example
$50,000 account, 10% per position max:
- Stock at $52
- Sell $50 put (0.25 delta)
- Premium: $0.50
- Capital required: $5,000
- Return: 1% weekly
- 75% probability of success
Key Takeaways
Strike Price:
- The fixed price in your option contract
- Determines ITM/ATM/OTM status
- Controls probability of profit
- Affects premium received/paid
- Never changes once selected
- Most critical decision in options
Strike price selection separates successful traders from gamblers. Choose strikes based on probability and risk tolerance, not premium alone. Whether selling puts at strikes you’d happily own stock at, or selling calls at profitable exit points, let your strikes reflect a plan, not hope.