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Interactive Options Course
Lesson 9 of 9
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After selecting a strategy and expiration, traders face another important decision:
Which strike should I choose?
Whether selling puts, writing covered calls, or building spreads, strike selection affects nearly every outcome:
Fortunately, ORATS makes it possible to compare these choices systematically.
Generally speaking, strikes closer to the current stock price offer:
Strikes further away from the current stock price typically offer:
Neither approach is universally correct.
The appropriate choice depends on a trader’s objectives and risk tolerance.
Suppose AAPL is trading at $220.
A trader considering a short put strategy might examine:
Each choice represents a different balance between risk and reward.
The closer the strike is to the stock price, the more premium the strategy is likely to generate, but the greater the chance of the option finishing in-the-money.
ORATS allows traders to evaluate how different strike distances have historically affected performance. Users can compare strategy parameters including strike placement and analyze resulting performance metrics. [orats.com], [interactiv…rokers.com]
A useful workflow is:
Focus on:
One of the most common mistakes among options traders is focusing exclusively on win rate.
Consider two hypothetical strategies:
Strategy A
Strategy B
The strategy with the higher win rate is not always the superior strategy.
This is why ORATS provides additional performance measures that help place returns in context.
Strike selection is often discussed as though there is a universally correct answer.
In reality, the best strike depends on:
Historical analysis can help reveal how different choices have behaved over time.
Rather than asking:
“Which strike should I choose?”
A more productive question may be:
“What are the historical consequences of choosing one strike over another?”
That is precisely the type of question ORATS was designed to help answer.
Using AAPL or another familiar stock:
You’ll quickly discover that even small changes in strike selection can have a significant impact on the historical characteristics of a strategy.
The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Interactive Brokers, its affiliates, or its employees.
Options involve risk and are not suitable for all investors. For information on the uses and risks of options, you can obtain a copy of the Options Clearing Corporation risk disclosure document titled Characteristics and Risks of Standardized Options by going to the following link ibkr.com/occ. Multiple leg strategies, including spreads, will incur multiple transaction costs.
The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Interactive Brokers, its affiliates, or its employees.
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