Lesson

Strike Selection: ITM, ATM, OTM | Options Educator

Deep dive into choosing the right strike price based on conviction, timeframe, and volatility.

In this lesson

Deep Dive: Intrinsic vs Extrinsic Value

  • Intrinsic value = immediate exercise value
  • Extrinsic value = time + volatility premium
  • ATM options have maximum extrinsic value
  • Deep ITM options act more like stock (mostly intrinsic)

The Moneyness Spectrum

  • Deep ITM = stock substitute with less capital
  • ATM = highest gamma, best for uncertain magnitude
  • OTM = leverage play requiring conviction
  • Deep OTM = lottery tickets, use sparingly

Strike Selection for Time Horizons

  • Short-term: Stay near ATM for gamma
  • Medium-term: ATM or slightly OTM with conviction
  • Long-term: Deep ITM for stock-like behavior
  • Always match strike aggression to time available

Volatility and Strike Selection

  • High IV: Sell premium or buy ITM/spreads
  • Low IV: Buy ATM options for cheap gamma
  • Earnings: Avoid OTM due to IV crush risk
  • Check IV Rank before selecting strikes

Advanced Strike Concepts: Skew and Term Structure

  • OTM puts usually have higher IV than ATM (skew)
  • OTM calls often have lower IV (relative value)
  • Skew affects spread pricing significantly
  • Term structure: different expirations = different IVs

Building Your Strike Selection Checklist

  • Always define thesis before selecting strike
  • Match conviction level to strike distance
  • Check IV rank for buying vs selling bias
  • Use the decision tree for consistent selection

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