How to Choose a Strike Price: ITM, ATM, OTM in One Sitting

The Cheapest One Is Usually Wrong

Open an option chain: one stock, one expiry, twenty strikes. The low ones look expensive and steady; the high ones cheap and tempting. Most beginners tap the cheapest — then the stock rises and the option still expires worthless.

Direction was fine. The strike was wrong. That single choice sets your cost, your odds, your breakeven, and your payoff.

The First Ruler: Three Zones Around the Spot Price

Every strike is classified relative to the current stock price. For calls on a $100 stock:

In the money (strike < spot, e.g. $90): exercising now already yields real intrinsic value ($10 here). At the money (strike ≈ spot, $100): almost no intrinsic value — you are paying almost purely for future movement. Out of the money (strike > spot, $110): worthless if exercised now; you are buying pure possibility.

The further toward "cheap," the closer to a lottery ticket. Puts mirror the direction (ITM means strike above spot), but the principle is identical: the further from spot, the bigger the move you are betting on.

Pricing the Three Zones: Certainty for Leverage

Same $100 stock: the $90 ITM call runs about $12 (pricey); the $100 ATM about $5; the $110 OTM maybe $2 (cheap).

Cheapness hides two costs: the OTM call must first climb past its strike before gaining any intrinsic value (the stock must rise $10 before you are even on the board), and it is nearly all time value — decaying daily toward zero if the stock stalls.

The $12 ITM call is mostly intrinsic value and moves nearly one-for-one with the stock — steady, but capital-heavy and low-leverage. There is no best zone, only a trade: you are not choosing a price, you are choosing how much certainty to swap for how much leverage.

Delta: Seeing Through "Cheap" at a Glance

Delta measures how much the option moves per $1 of stock — but its useful second identity is a rough win-rate intuition. Delta 0.7 ≈ roughly 70% odds of expiring ITM; a deep-OTM 0.2 ≈ about 20%.

That instantly decodes "cheap": the $2 OTM call is cheap because it usually dies worthless. ITM = high Delta, high odds; ATM ≈ 50/50; OTM = low Delta, low odds. Cheapness and low odds are two faces of one coin.

Caveat: Delta-as-probability is an approximation — it drifts notably in high-vol regimes or near dividends. Intuition, not guarantee.

Breakeven: The Most Ignored, Most Lethal Number

Many assume that clearing the strike means profit. Wrong — the premium must be earned back first. Call breakeven = strike + premium.

All three zones: ITM 90 + 12 = $102; ATM 100 + 5 = $105; OTM 110 + 2 = $112.

See it? The "cheapest" OTM call carries the highest breakeven — from $100, the stock must rise over 12% before you earn a cent. "The stock rose and the option still lost" is almost always a breakeven never reached.

The Seller's Mirror

Buyers pick strikes betting the stock reaches the price; sellers bet it never gets there — caring not about leverage but margin of safety.

Selling a put, you want the strike comfortably below spot. Delta serves again: sell a |0.2| put and there is roughly a 20% chance it finishes ITM — i.e., about 80% odds of simply keeping the premium.

No free money though: the safer and farther the strike, the thinner the premium. One row of strikes — buyers read it left-to-right for leverage, sellers right-to-left for safety. Grasp that mirror and you can read the whole chain.

Three Questions Before Ordering + Four Traps

Three questions: ① How sure is your direction? Conviction of a big move → OTM leverage; mild bullishness → ITM stability. Map confidence to Delta. ② How much will you pay for certainty? ITM costs more but bleeds slower; OTM is cheap but usually dies. ③ Where must the stock go for you to break even? Compute it, then answer honestly: can it clear that line in time?

Four traps: buying only the cheapest deep-OTM (a low-odds lottery ticket); reading the strike but never the breakeven; equating high Delta with guaranteed profit (bigger capital, bigger absolute loss when wrong); and forgetting IV — pre-earnings, every strike is inflated, so even the right strike can be bought at the worst price.

All four traps point one way: cheap, high leverage, high odds — pick two, never three. Strike selection is matching that trade-off to your actual conviction.