What Is A Strike Price? (Options In Plain English)

Why It Matters

Understanding strike selection turns options from guesswork into a probability‑based strategy, helping traders manage risk and improve returns.

Key Takeaways

• Choose strikes based on expected move and time, not price.
• In‑the‑money options cost more but react like the underlying stock.
• At‑the‑money strikes sit near current price, offering quick value gains.
• Out‑of‑money strikes are cheap but require larger moves to profit.
• Evaluate how far the stock must move by expiration before buying.

Summary

The video explains that a strike price is the “line in the sand” of an options contract and argues that traders should select strikes based on the expected price move and time horizon rather than chasing the lowest premium.

Kirk breaks down the cost‑vs‑sensitivity trade‑off: in‑the‑money (ITM) strikes are pricier but move almost dollar‑for‑dollar with the stock; at‑the‑money (ATM) strikes sit near the current price and react quickly to small moves; out‑of‑the‑money (OTM) strikes are cheap but need a larger move to become valuable. He stresses evaluating probability, not price.

Using a short call spread on XLP at $81.55, he shows the 82‑call requires only a $0.45 move in four days, whereas the 84‑85 calls would need multi‑dollar jumps. He likens strike selection to choosing flights—cheaper tickets often come with tighter connections and higher risk.

By applying this structured framework, traders can avoid the “lottery ticket” mindset, improve risk‑reward calculations, and increase the odds of profitable trades. The next lesson will cover option premiums, completing the foundation for disciplined options trading.

Original Description

Most beginners pick a strike price the way they pick a lottery ticket: scroll until they see the cheap one… pick it… and hope they look like a genius.

In this lesson of Options in Plain English, I’ll show you a simple, repeatable way to choose strike prices with structure—so you can take the guesswork out of options trading.

Strike price in plain English:

It’s the price level the contract is built around—the “line in the sand” that determines what has to happen for your option to matter.

In this lesson, you’ll learn:

What strike price means for calls vs puts

Why strike price changes (1) what you pay and (2) how the option behaves

The “cheap strike” trap (and what it’s really costing you)

A real example using an options chain (XLP short call spread)

The simple framework: ITM vs ATM vs OTM

The 2 questions to ask before you pick any strike:

How far does the stock need to move for this to matter?

Do I have enough time for that move to happen?

Rule to remember:

Don’t pick strikes based on what’s cheap.

Pick strikes based on the move you realistically expect and the time you have.

Quick assignment (10 seconds):

Next time you look at an options chain, choose one strike and say out loud:

“This strike needs a move of ___ by ___.”

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This video is for educational purposes only and is not a recommendation for buying/selling any security. Options trading is risky, so please read our full risk disclosure here: https://optionalpha.com/legal/risk-disclosure-agreement