Option Fundamentals
IN THIS LESSON
Strike Price Selection
Chapter 2 of Theta Bridge Academy. Learn how ITM, ATM, OTM, probability, premium, and risk/reward come together when choosing the right strike price.
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Theta Bridge
Strike Price Selection
Chapter 2 of Theta Bridge Academy. Learn how ITM, ATM, OTM, probability, premium, and risk/reward come together when choosing the right strike price.
Learning Objectives
Strike selection is where probability, premium, and risk meet. This chapter teaches the decision process.
Chapter 2
Strike Price
Understand the agreed contract price where shares may be bought or sold.
Moneyness
Learn ITM, ATM, and OTM for both calls and puts.
Probability
Use Delta as a practical shortcut for probability thinking.
Risk/Reward
Learn why higher premium usually comes with higher risk.
01
What Is A Strike Price?
The strike price is the contract price inside the option.
Core Definition
The strike price is the predetermined price at which shares can be bought or sold if the option is exercised or assigned.
Think of it as the price written into the contract. If the option becomes active through exercise or assignment, the strike price decides where the share transaction happens.
Example: if MSFT trades at $450 and you sell a $430 put, you are agreeing to potentially buy 100 shares at $430. If you sell a $470 covered call, you are agreeing to potentially sell 100 shares at $470.
Quick Check
MSFT trades at $450. Which strike is closest to the current stock price?
Select the best answer.
02
Understanding Moneyness
Moneyness describes where the strike sits relative to the stock price.
ITM / ATM / OTM
Moneyness tells you whether an option is In The Money, At The Money, or Out Of The Money.
This matters because moneyness affects premium, probability, assignment risk, and the amount of intrinsic value inside the contract.
ITMAlready has intrinsic value. Usually higher premium and higher assignment risk.
ATMStrike is near the current stock price. Usually highest time value.
OTMNo intrinsic value yet. Lower premium, but often higher probability for sellers.
Calls: ITM, ATM, OTM
For calls, lower strikes are more valuable because a call gives the right to buy.
Call Options
ITM Call
MSFT = $450. A $400 call is ITM because it gives the right to buy at $400 while the market is $450.
ATM Call
MSFT = $450. A $450 call is ATM because the strike is near the current stock price.
OTM Call
MSFT = $450. A $500 call is OTM because the stock must rise before the contract has intrinsic value.
Puts: ITM, ATM, OTM
For puts, higher strikes are more valuable because a put gives the right to sell.
Put Options
ITM Put
MSFT = $450. A $500 put is ITM because it gives the right to sell at $500 while the market is $450.
ATM Put
MSFT = $450. A $450 put is ATM because the strike is near the current stock price.
OTM Put
MSFT = $450. A $400 put is OTM because the stock must fall before the contract has intrinsic value.
Quick Check
MSFT trades at $450. A $500 call is:
Think about whether the right to buy at $500 is already valuable.
Risk vs Reward
Premium is not free money. Higher premium usually means the market is paying you more because the risk is higher.
Higher Premium = Higher Risk
Example Options Chain
MSFT at $450
Different strikes create different trade profiles. The sweet spot is often not the highest premium.
| Put Strike | Premium | Approx Probability | Risk Style | Theta Bridge View |
|---|---|---|---|---|
| $400 | $1.00 | Very High | Conservative | Safe, low premium |
| $430 | $4.00 | Balanced | Moderate | Potential sweet spot |
| $450 | $8.00 | Medium | Aggressive | High assignment risk |
| $470 | $15.00 | Low | Very aggressive | Premium chasing |
03
Strike Selection for CSPs
Get paid to potentially buy a company you actually want to own.
Cash-Secured Puts
The correct question is not: How much premium can I get?
The correct question is: At what price would I happily own this company?
The correct question is: At what price would I happily own this company?
Example: PLTR trades at $140. If you would happily buy PLTR at $125, you can sell a $125 put. If PLTR stays above $125, you keep the premium. If PLTR falls below $125, you may buy shares at the price you already liked.
04
Strike Selection for Covered Calls
Get paid to potentially sell shares at a price you are happy with.
Covered Calls
The correct question is: At what price would I be happy selling my shares?
Example: you own PLTR at $140. If you would be happy selling at $165, you can sell a $165 covered call. If PLTR stays below $165, you keep the premium. If PLTR rises above $165, you may sell shares at a profit.
The Theta Bridge Framework
We choose strikes based on process, not greed.
6-Step Process
1. Quality
Choose a company you are willing to own or already own.
2. Price
Identify a buy or sell price that fits your plan.
3. Delta
Look for a probability zone, often around 20–30 Delta.
4. Support
Check whether the strike aligns with technical support or resistance.
5. Premium
Confirm the premium is worth the risk.
6. Execute
Enter only when the trade fits the framework.
Quick Check
What usually happens when premium increases?
Think risk/reward.
Final Quiz
Final Chapter Check
What Delta range does Theta Bridge commonly use as a balanced starting point for income strategies?
Chapter 2 Summary
✓ Strike price is the contract price
✓ ITM means the option already has intrinsic value
✓ ATM means the strike is near the stock price
✓ OTM means the option needs movement to gain intrinsic value
✓ Higher premium usually means higher risk
✓ Delta can help estimate probability
✓ CSP strikes should be prices you are happy buying
✓ Covered call strikes should be prices you are happy selling
✓ Theta Bridge commonly starts around 20–30 Delta
✓ Process beats emotion and premium chasing