Common Mistakes in Choosing Strike Price for Options Trading
Introduction
Choosing the right strike price can be the difference between a profitable options trade and a total loss. Yet many traders—especially beginners—fall into common traps. In this guide, we’ll explore the most frequent mistakes in choosing strike price and how you can avoid them.
Mistake #1: Going Too Far Out-of-the-Money (OTM)
Many beginners chase cheap options with deep OTM strike prices hoping for a big payday. These options often expire worthless.
Why it’s risky:
- Low probability of reaching strike
- Fast time decay
- False sense of affordability
Fix: Choose strike prices with higher delta (0.30–0.60) and a realistic probability of becoming profitable.
Mistake #2: Ignoring Time to Expiry
Picking a strike price without considering the time left can lead to poor timing.
Example: Choosing an OTM weekly option with only 1–2 days to expiration gives little room for movement.
Fix: Match strike price with time horizon.
- Short-term: Use ATM/ITM
- Long-term: OTM may be okay with more time
Mistake #3: Not Calculating Breakeven Price
Some traders don’t realize their trade isn’t profitable until the stock moves beyond the breakeven, which is strike ± premium.
Fix: Always calculate breakeven:
- Call: Strike + Premium
- Put: Strike – Premium
Ensure your market target exceeds that level.
Mistake #4: Ignoring Open Interest and Volume
Choosing a strike price with low open interest can lead to poor liquidity and wide bid-ask spreads.
Fix:
- Stick to strikes with high OI and volume
- Use liquid tickers like SPY, QQQ, AAPL, MSFT
Mistake #5: Choosing Strikes Emotionally
Traders often pick round-number strike prices or ones that “feel good” without market analysis.
Fix: Base your decision on:
- Support and resistance levels
- Technical indicators
- Expected price movement and volatility
Quick Recap Table
| Mistake | Why It’s Bad | How to Avoid |
|---|---|---|
| Deep OTM selections | Low chance of success | Use realistic delta/targets |
| Ignoring expiration timing | Options may not move fast enough | Match strike with trade duration |
| No breakeven calculation | Misjudged profitability | Always factor in premium |
| Low liquidity strikes | Harder to exit or enter | Use high volume and OI strikes |
| Emotional decision-making | Unplanned risk | Rely on technical/fundamental data |
Conclusion
Avoiding these strike price mistakes will improve your options trading performance, help you control risk, and allow you to make smarter trade entries. Always combine strike selection with a sound trading plan and disciplined risk management.
FAQs
Q1. What’s the biggest mistake in choosing strike prices?
Chasing cheap, far OTM options without considering the probability of success.
Q2. Is low premium always a bad sign?
Not always—but it can signal low probability or low liquidity. Confirm with volume and delta.
Q3. Should I use the same strike selection method for calls and puts?
The logic is similar, but always consider the direction of your trade and market conditions.
Q4. How can I tell if a strike has good liquidity?
Check the option chain for high volume and open interest, and tight bid-ask spreads.
Q5. Is it better to buy multiple cheap OTM contracts or fewer ITM contracts?
Fewer ITM contracts often provide higher probability and better control of risk.
