Strike price is the fixed price at which an option holder has the right to buy (call option) or sell (put option) the underlying asset when exercising the option.
Understanding Strike Price
When you buy an option, the strike price is frozen at that contract’s creation. It never changes.
Example: EUR/USD is 1.1050. You buy a call option with 1.1100 strike. That strike is permanently 1.1100—not 1.1051 (current price), not 1.1200 (if it rallies). Always 1.1100.
This strike is what you have the right to exercise at. If EUR/USD reaches 1.1200, you can exercise your 1.1100 call and buy at 1.1100 (100 pips profit below market).
How Strike Price Affects Option Premium
Strike price determines how much intrinsic value the option has:
For calls:
- Strike below current price = intrinsic value = option is more expensive
- Strike at current price = zero intrinsic value = medium price
- Strike above current price = zero intrinsic value = option is cheaper
For puts:
- Strike above current price = intrinsic value = option is more expensive
- Strike at current price = zero intrinsic value = medium price
- Strike below current price = zero intrinsic value = option is cheaper
Example: EUR/USD = 1.1000
- 1.1100 call (100 pips OTM): Might cost $200 premium
- 1.1000 call (ATM): Might cost $400 premium
- 1.0900 call (100 pips ITM): Might cost $600 premium
The deeper ITM, the more expensive because intrinsic value is real (you’re paying for guaranteed profit if exercised).
In-the-Money vs. Out-of-the-Money
In-the-Money (ITM): Option has intrinsic value—would profit if exercised immediately.
- Call ITM: Market price > strike price
- Put ITM: Market price < strike price
At-the-Money (ATM): Strike equals market price—zero intrinsic value.
Out-of-the-Money (OTM): Option has no intrinsic value—would lose if exercised now.
- Call OTM: Market price < strike price
- Put OTM: Market price > strike price
Choosing Strike Prices
Conservative approach: Buy deep ITM options (expensive premium but high probability of profit).
- Example: EUR/USD 1.1000, buy 1.0950 call (50 pips ITM)
- Probability of profit: Very high (95%+)
- Leverage: Low (premium is expensive)
- Use case: High-conviction trades where winning is more important than maximum profit
Aggressive approach: Buy deep OTM options (cheap premium but low probability).
- Example: EUR/USD 1.1000, buy 1.1200 call (200 pips OTM)
- Probability of profit: Low (20-30%)
- Leverage: Extreme (premium is cheap, position exposure is large)
- Use case: High-risk/high-reward bets where huge move is expected
Balanced approach: Buy ATM or slightly OTM options (moderate premium, moderate probability).
- Example: EUR/USD 1.1000, buy 1.1100 call (100 pips OTM)
- Probability of profit: Medium (40-50%)
- Leverage: Moderate (premium is reasonable, exposure is controlled)
- Use case: Most trading situations
Strike Price and Expiration
Strike choice also depends on expiration:
Short expiration (days): Pick ATM or ITM strikes (time decay is severe, OTM decays to worthless fast).
Long expiration (months): Can afford OTM strikes (more time for move to occur before expiration).
Example:
- 1-week expiration: Buy 1.1000 call when price is 1.0980 (slightly OTM but close)
- 3-month expiration: Can buy 1.1100 call when price is 1.1000 (more comfortable waiting 3 months for move)
Strike Price Selection Examples
Scenario 1 (High conviction bullish)
- Current: EUR/USD 1.1000
- You expect 250+ pip rally to 1.1250+
- Strike choice: 1.1100 call (slightly OTM)
- Reasoning: Needs 100 pips movement but high confidence occurs. 3-month expiration gives time.
Scenario 2 (Uncertain but want protection)
- Current: EUR/USD 1.1000, you’re long
- You expect crash possible but unsure
- Strike choice: 1.0900 put (100 pips OTM—expensive but protecting major losses)
- Reasoning: Insurance—don’t need profit, just protection. Worth paying premium.
Scenario 3 (Lottery trade—maximum leverage)
- Current: EUR/USD 1.1000
- You have strong opinion price will crash to 1.0700 (300 pips)
- Strike choice: 1.0800 put (200 pips OTM)
- Reasoning: Cheap premium, maximum leverage. Low probability but massive payoff if correct.
Strike Price and Probability
There’s a mathematical relationship between strike distance and probability:
- ATM strikes: ~50% probability of finishing ITM
- 1 standard deviation OTM: ~32% probability
- 2 standard deviations OTM: ~5% probability
Professional traders use this to calculate expected value:
Expected Value = (Probability of profit × Profit) - (Probability of loss × Loss)
Buying 50-to-1 lottery option (probability 2%, profit 5000%, loss 100%)? EV = (0.02 × 50) - (0.98 × 1) = 1 - 0.98 = 0.02 = +2% expected value
Sounds good! But over 100 such trades, probability means you’ll lose 98 times and win 2 times. You need massive wins to overcome the losses. Most traders can’t execute 100 trades of the same type—they get bored and make mistakes.
Strike Price Mechanics
Can’t change strike: Once your option contract is set, strike is permanent.
Can close and reopen: If you bought 1.1100 call but situation changed, you can close it and buy 1.1000 call instead. But this incurs spread costs twice—expensive.
Strike defines your plan: Before buying any option, know your strike is your plan. You can’t adjust it. You can only exit and re-enter.
Professional Strike Selection
Most professional option traders:
- Identify their outlook (bullish/bearish/neutral)
- Calculate probability of various strikes
- Pick strike with best risk-reward (not highest probability)
- Choose expiration that gives time without excessive decay
- Execute and monitor, not adjust
They don’t overthink strike selection. They pick reasonable strike based on their outlook, and let time/price move do the work.
Building Strike Price Judgment
After 20-30 option trades, log:
- Strike chosen vs. current price
- How much time to expiration
- What happened—did the move occur?
- Did you pick strike too deep OTM (missed move)?
- Did you pick strike too deep ITM (overpaid)?
Over time, you’ll develop intuition for which strikes suit different market conditions and timeframes.
Strike price selection is where option trading edge lives—not in predicting direction, but in pricing risk-reward correctly.
