How to Select Strike Price in Equity Options Trading
How to select strike price in equity options?
Choosing the right strike price depends on your market view, risk tolerance, time horizon, volatility, and expected move in the underlying stock. Strike selection should align with probability and trade strategy, not emotions or premium size.
TL;DR
Pick strike price in equity options based on market direction, expected move, and risk appetite.
ATM for balance, ITM for higher probability, OTM for high-reward but lower probability trades.
Why Strike Price Selection Matters in Equity Options
The strike price is critical because it determines:
The premium you pay
Potential profit and loss
Probability of the option expiring in-the-money
Risk-reward ratio
Even if your directional call is correct, picking the wrong strike can lead to losses. Structured strike selection ensures that trades are based on strategy rather than guessing.
Understanding Strike Price in Equity Options
Strike price is the predetermined price at which the option buyer can buy (call) or sell (put) the underlying stock.
In-the-money (ITM) → Strike favorable relative to current stock price
At-the-money (ATM) → Strike near current stock price
Out-of-the-money (OTM) → Strike above (calls) or below (puts) current stock price
Each type has a different cost, probability, and risk profile.
Selecting Strike Price Based on Market Direction
A clear market view is the first step.
Bullish View – Call Options
If you expect the stock price to rise:
ITM Call → Higher probability of profit, higher premium, lower percentage returns, safer
ATM Call → Balanced risk-reward, most liquid, reacts quickly to price movement
OTM Call → Low premium, high potential returns, requires strong movement
Decision guide:
Mild upward trend → ATM
Strong breakout expected → Slightly OTM
Risk-averse → ITM
Bearish View – Put Options
If you expect the stock price to fall:
ITM Put → Safer, higher probability
ATM Put → Balanced exposure
OTM Put → Aggressive move play
Strike choice depends on expected magnitude and speed of the move.
Neutral View – Sideways Stocks
If you expect the stock to trade in a range:
Selling ATM options can benefit from time decay
Spreads can protect capital around key support and resistance levels
Avoid far OTM buying unless volatility expansion is expected
Strike Selection Based on Expiry
Time until expiry affects both risk and reward.
Weekly Expiry
Quick price movements matter
ATM strikes are most active and liquid
OTM options can expire worthless quickly
Fast time decay
Monthly or Longer Expiry
More time for expected price movement
ITM provides safety
Slower time decay, suitable for swing strategies
Strike Selection Based on Volatility
Volatility impacts both premium and probability of success.
High Volatility
Premiums are expensive
OTM options are risky
ITM options are more stable
Spreads help reduce risk
Low Volatility
Premiums cheaper
OTM options can work if a volatility spike is expected
ATM reacts efficiently to small moves
Probability vs Reward
Strike price determines the trade-off between probability and potential payoff.
| Strike Type | Probability | Cost | Reward Potential | Risk Level |
|---|---|---|---|---|
| ITM | High | High | Moderate | Lower |
| ATM | Medium | Medium | Good | Balanced |
| OTM | Low | Low | High | High |
Chasing cheap OTM options can be tempting but carries low probability.
Using Delta for Strike Price Selection
Delta provides a numerical measure of probability:
Delta 0.50 → ATM
Delta 0.60–0.70 → Slightly ITM
Delta 0.30–0.40 → Slightly OTM
Delta below 0.20 → Far OTM
Guidelines:
Higher probability → Delta above 0.60
Balanced → Around 0.50
Aggressive → 0.25–0.35
Using delta removes emotional bias in strike selection.
Support and Resistance for Strike Selection
Technical levels improve strike selection accuracy:
Near support → ATM or slightly OTM calls if expecting bounce
Near resistance → ATM or slightly OTM puts if expecting reversal
Breakout levels → Slightly OTM in direction of breakout
Strike should match the expected move, not just the current price.
Intraday vs Positional Strike Selection
Intraday
ATM preferred for liquidity
Quick reaction to price moves
Tight stop-loss
Small target, fast exit
Positional
ITM for stability
Longer expiry for swing positions
Spreads to manage risk
Focus on larger, slower moves
Strike selection must match holding period.
Risk Management in Equity Options
Strike price defines potential loss in buying options.
Allocate capital per trade
Avoid overexposure on a single strike
Do not average losing OTM positions
Predefine stop levels
Even a technically correct strike can fail without proper risk management.
Common Mistakes in Strike Selection
Buying OTM due to low premium
Ignoring time decay
Trading without clear directional view
Overtrading in volatile sessions
Holding losing options hoping for reversal
Selecting strike based on emotion
Ignoring volatility changes
Structured strike selection avoids these errors.
Advanced Strike Selection Techniques
Open Interest Analysis
High open interest levels can indicate potential support or resistance. Selecting strikes near these levels can improve probability.
Breakeven Calculation
Calculate option premium
Determine breakeven price
Compare with realistic expected move
Avoid strikes where breakeven exceeds plausible stock movement
Psychological Discipline
Options trading can be emotionally intense:
Fear → Deep ITM
Greed → Far OTM
Impatience → Weekly expiry
Strike selection should be systematic and based on probability, not emotion.
Key Takeaways
Strike price depends on direction, expiry, volatility, and risk tolerance
ATM provides balanced risk-reward
ITM offers higher probability and stability
OTM offers higher reward but lower probability
Delta helps quantify probability and risk
Weekly expiry requires faster decision-making
Risk management is essential
Final Thoughts
There is no universal “best strike.”
The right strike aligns with:
Market view
Expected move
Holding period
Volatility environment
Risk tolerance
Focus on probability, structure, and disciplined risk control rather than chasing cheap premiums. Consistency in strike selection is the key to success in equity options trading.
