Strike selection | The Greeks Desk

Once you understand the mechanics of a credit spread, the next question is where to place it. Two choices matter most: how far out of the money your short strike sits, and how wide the spread is. Neither has one correct answer, but both follow a clear tradeoff that's worth understanding before you place a trade.

The short strike, the one you sell, sets how much room the underlying has to move before the trade starts losing. The further out of the money it is, the more room you have, but the smaller the credit you collect for taking on the trade in the first place.

A simple example. Say an index is trading at $15,000. Selling a put spread with the short strike at $14,900, close to the money, might collect a large credit, but leaves little room before the trade is challenged. Selling the short strike at $14,700 instead, further away, collects less credit but gives the underlying more room to move against you before the trade is at risk.

Delta as a rough probability gauge

Delta, covered earlier in this curriculum, isn't only a measure of directional sensitivity. It also works as a rough estimate of the odds an option finishes in the money. Selling a strike around 0.15 to 0.20 delta roughly targets an 80-85% chance that option finishes out of the money at expiry. It's an estimate drawn from current pricing, not a guarantee, but it's a useful, consistent way to compare strikes across different trades rather than eyeballing distance in points or dollars.

Width: premium against max loss

The second choice is how wide to make the spread, the distance between your short strike and the long strike you buy for protection. A wider spread collects more credit, because the protective leg is further away and cheaper. But it also means a larger max loss if the trade goes against you, since max loss is the width minus the credit received. A narrower spread does the opposite: smaller credit, smaller max loss. Neither is inherently right; it's a direct tradeoff between how much you can make and how much you can lose.

There's no single right strike

Every combination of short strike and width sits somewhere on the same tradeoff: a higher probability of profit generally means a smaller reward relative to the risk taken, and a bigger reward generally means giving up some of that probability. Strike selection is about deciding, deliberately, where you want to sit on that curve for a given trade, not about finding a formula that removes the tradeoff.

Rule of thumb. Don't chase extra premium by selling closer to the money than your risk tolerance and position sizing, covered in position sizing, actually support. A bigger credit that you can't comfortably survive being wrong on isn't a better trade.

What this doesn't mean

It doesn't mean delta is a precise probability. It's a snapshot estimate from the option's current price, and it changes as the market moves.
It doesn't mean wider is always worse or narrower is always better. Both are valid choices depending on what you're trying to achieve.
It doesn't mean this is a recommendation for any specific strike or trade. Every underlying and market condition is different.