How to Choose the Right Strike Price for Options: Beginner Guide

— Ben, Find Better Trades

When you open your brokerage app and look at an options chain for the very first time, the endless ladder of numbers can freeze you in your tracks. Welcome to Part 38 of our beginner series, where we are going to fix that confusion for good.

Picking the wrong strike price is the single most common reason beginners lose money even when they correctly guess the stock’s direction. Today, I will teach you how to choose the right strike price every single time with zero guesswork.

What a Strike Price Actually Represents in Plain English

Think of a strike price as a legal contract line drawn directly in the sand. It is the guaranteed price where you reserve the right to buy or sell the underlying shares before the clock runs out.

If you buy a call option, the strike is the exact dollar amount where you can demand to buy 100 shares. If you buy a put option, it is the guaranteed dollar amount where you can force someone else to buy 100 shares from you.

The stock market does not care about what price you paid for your contract. The stock market only cares about where the stock price is trading relative to that specific line in the sand.

Think of it like booking a hotel room six months in advance with a locked-in rate of $150 per night. That $150 locked rate is your strike price.

If hotel prices surge to $300 across the city on that weekend, your reservation voucher becomes incredibly valuable. If city-wide hotel prices drop to $80, nobody wants your voucher because anyone can book a cheaper room on the open market.

The Three Zones: ITM, ATM, and OTM Strike Prices

Every options chain divides strike prices into three distinct psychological and financial zones. Understanding where your strike sits relative to current stock price is the foundation of smart strike selection.

In The Money (ITM) strikes already possess real, tangible cash value. For a call, an ITM strike sits below the current share price, while for a put, it sits above the current share price.

At The Money (ATM) strikes sit right at or immediately adjacent to the current market price of the stock. These options have zero intrinsic value, but they react quickly to any movement in the underlying shares.

Out of The Money (OTM) strikes represent pure hope and zero current intrinsic value. For a call, an OTM strike sits higher than the stock’s current price, and for a put, it sits lower.

When you buy an OTM strike, you are buying 100% extrinsic value, which we broke down in Part 7 of this series. That means if the stock sits perfectly still until expiration day, your entire investment evaporates to zero.

The Cheap Strike Price Trap (Why OTM Strikes Burn Beginners)

Almost every beginner instinctively scrolls down the options chain looking for the cheapest dollar price they can find. You see a $0.20 contract trading on a $100 stock and think you found an absolute bargain.

A $0.20 contract only costs $20 total out of your pocket. It feels safe because you cannot lose more than twenty bucks, but this is a dangerous psychological trap.

Those dirt-cheap contracts are cheap for a simple mathematical reason: they have almost zero statistical chance of expiring with real value. Professional market makers price those contracts cheaply because they are virtually certain to keep your $20 bill.

When you buy deep out-of-the-money options, you need a massive, violent move in the underlying stock just to break even. A modest, orderly move in your favor will still result in a total loss because time decay will chew your contract up faster than the stock can climb.

Buying five cheap lottery ticket strikes does not give you five chances to win. It simply gives you five separate positions that are all bleeding extrinsic value every single afternoon.

Worked Example 1: Buying an ITM vs. OTM Call Option

Let us look at a clear, realistic example to see how strike selection completely alters your profit potential. Suppose stock XYZ trades at exactly $100 per share, and you believe the stock is heading higher over the next 30 days.

Trader A buys one In-The-Money $95 Call for a premium of $7.00 ($700 total cash outlay). Trader B buys one Out-of-The-Money $110 Call for a premium of $0.80 ($80 total cash outlay).

Over the next three weeks, stock XYZ moves up moderately from $100 to $106 at expiration. Let us look at how both traders fare with their chosen strikes.

Metric	Trader A ($95 ITM Call)	Trader B ($110 OTM Call)
Initial Cost	$7.00 ($700)	$0.80 ($80)
Stock Price at Expiration	$106.00	$106.00
Contract Value at Expiration	$11.00 ($1,100)	$0.00 ($0)
Net Dollar Profit / Loss	+$400.00 Profit	-$80.00 Loss
Return on Investment	+57.1%	-100%

Trader A nailed the trade and locked in a $400 profit on their $700 investment because their strike held $11.00 of real intrinsic cash value ($106 stock minus $95 strike). Trader B correctly predicted the upward direction of the stock, but still lost 100% of their money because the stock never reached $110.

This is the harsh reality of strike selection. Trader B was technically right about the stock going up, but picked the wrong strike price and walked away with empty pockets.

Delta as Your Probability Compass for Picking Strikes

In Part 16, we covered Delta as the metric showing how much your contract price moves per $1 move in the stock. Delta also serves as an outstanding rough estimate of the probability that your strike finishes in the money.

A strike with a 0.70 Delta has roughly a 70% chance of expiring with real intrinsic value. A cheap out-of-the-money strike with a 0.10 Delta has roughly a 10% chance of expiring with any value at all.

When you buy an option with a 0.70 Delta, you are paying for real intrinsic cushion. The contract will mimic the price movement of 70 actual shares of stock while buffering you against aggressive time decay.

Lower delta strikes (like 0.20 or 0.15) require explosive, unexpected news events to become profitable. High delta strikes (like 0.65 to 0.80) simply require normal, steady market trends to produce solid gains.

If you want consistency in your trading account, you must stop shopping in the 0.10 Delta discount bin. Treat Delta as your quality filter before you ever click the buy button.

Worked Example 2: Picking a Put Strike Price for a Bearish Trade

Now let us examine a bearish trade on stock ABC, which currently trades at $50.00 per share. You expect the stock to face heavy selling pressure over the coming month and drop toward $45.00.

Trader A buys one In-The-Money $52.50 Put for $3.50 ($350 total cost). Trader B buys one Out-of-The-Money $45.00 Put for $0.60 ($60 total cost).

Two weeks later, the stock drops moderately to $47.00 at expiration. The drop happened just as expected, but the choice of strike price decides who actually gets paid.

Metric	Trader A ($52.50 ITM Put)	Trader B ($45.00 OTM Put)
Initial Cost	$3.50 ($350)	$0.60 ($60)
Stock Price at Expiration	$47.00	$47.00
Contract Value at Expiration	$5.50 ($550)	$0.00 ($0)
Net Dollar Profit / Loss	+$200.00 Profit	-$60.00 Loss
Return on Investment	+57.1%	-100%

Trader A’s contract is worth $5.50 at expiration ($52.50 strike minus $47.00 stock price), producing a net gain of $200. Trader B’s contract expires completely worthless because the stock stopped at $47.00 instead of dropping below the $45.00 strike.

Trader A had breathing room because the strike already had intrinsic value when the trade started. Trader B needed perfection, and perfection rarely happens in the stock market.

Ben’s Step-by-Step Rule of Thumb for Your First Real Trade

When you are ready to execute your first directional option trade, here is the exact framework I recommend you follow. This rule of thumb prioritizes capital protection and statistical edge over reckless leverage.

First, identify your directional bias and verify that the stock has steady momentum. Never buy options on completely flat, sideways stocks.

Second, locate the strike price that sits one or two strikes In The Money. Look specifically for a Delta reading between 0.65 and 0.75.

Third, check your total capital commitment to ensure the trade fits your account size. If buying an ITM contract on a $200 stock requires too much cash, switch to a cheaper stock rather than buying a junk OTM strike on the expensive stock.

Finally, calculate your exact break-even point before submitting your order. For a call, add the premium to the strike price; for a put, subtract the premium from the strike price.

By sticking to deep or moderate ITM strikes, you give your thesis room to breathe. You no longer need a miraculous home-run move just to scratch out a profit.

Common Mistakes Beginners Make With This

Buying strikes based entirely on dollar cost rather than probability. Beginners often look at their remaining account balance and buy whatever strike fits their remaining $40, which almost always lands them on deep OTM junk with zero probability of success.

Ignoring the break-even math before submitting the trade. If you buy a $105 call for $3.00 on a $100 stock, the stock must reach $108.00 just for you to break even at expiration, meaning you need an 8% rally just to get your original cash back.

Choosing OTM strikes when stock implied volatility is low. When volatility is low, options are relatively cheap across the entire chain, making it the perfect time to buy high-quality ITM strikes rather than settling for low-probability OTM strikes.

Failing to adjust strike selection to the stock’s actual average range. If a stock historically moves only $2 per month, buying a strike that sits $10 away from the current price guarantees a losing trade regardless of market conditions.

Holding losing OTM strikes all the way to expiration day. Beginners often watch an OTM strike decay from $0.50 down to $0.05, refusing to cut the loss because it feels like a small dollar amount, which slowly drains their account over multiple trades.

Strike Price Selection FAQ for New Traders

Should I ever buy out-of-the-money options as a beginner? I strongly advise beginners against buying OTM options because the mathematical odds are stacked against you from the first minute. Until you have consistent profitability, stick to slightly ITM contracts that provide real intrinsic value.

Why are In-The-Money options so much more expensive? ITM options cost more because they contain real intrinsic cash value that you could extract immediately by exercising the contract. You are paying for higher probability and an asset that acts much more like actual stock.

How do I find the Delta of a strike on my broker screen? You can customize the table columns on your broker’s options chain to display Greeks. Look for the column labeled ‘Delta’ next to the strike prices to see each option’s sensitivity and approximate win probability.

What strike should I choose if I want to play an earnings announcement? As we covered in Part 36 and Part 37, playing earnings with long options is very risky due to IV crush, but if you do trade it, choose an At-The-Money or slightly ITM strike to minimize extrinsic value collapse.

Now that you know how to lock down the right strike price on your chain, let’s tackle the second half of the trade setup: figuring out whether you should buy weekly or monthly expiration dates in Part 39.

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