Strike Width

What Is Strike Width?

Strike width is the normal distance between the strike prices of the options listed on different securities. For example, options might be listed on a stock with a strike width of $2.50 between strikes, while another may have a strike width of $1.00, and others $10.00 (for example, on account of a large stock index).

Strike width is generally usually associated with options strategies that incorporate spreads, for example, credit spreads, butterflies, or iron condors.

How Strike Width Works

Strike width matters in options trading strategies that depend on a spread, for example, credit spreads or iron condors. The larger the strike width, the more risk that the option seller is taking on. For a buyer however, the potential for greater profits exists with a larger strike width compared to one with a more modest strike width. Expanding the strike width can further develop an investor's upside potential, however generally, this means there is a greater amount of an upfront cost to the spread.

The price of an option relies upon several factors, including the price of the underlying asset, the implied volatility of the option, the period of time until expiration, and interest rates. The strike price of the option addresses the price at which a put or call option can be exercised. Investors selling options need to guarantee that the strike price they pick will maximize their likelihood for profit.

Strike Width Example

Suppose an investor needs to sell a call spread in MSFT, which is trading at $100. The trader chooses to sell 1 MSFT March 100 strike call and buy 1 MSFT March 110 strike call. The strike width is 10, which is calculated as 110 - 100. For this trade, the investor will receive credit since the call being sold is at the money and subsequently has more value than the out-of-the-money (OTM) option being bought.

Presently, consider in the event that the trader sold the 100 call and buys a 130 call. The strike width is 30. Accepting similar number of options are traded (as in scenario one), the credit received will increase substantially, since the bought call is even farther of the money and costs not exactly the 110 strike option. The risk on the trade has additionally increased substantially for the seller in the subsequent scenario. The max risk in the two scenarios is the width of the spread minus the credit received.

In the subsequent scenario, the premium received is greater, so the potential profit is larger than the first, yet the risk is larger assuming that the stock continues to head higher. The main scenario has a more modest premium received than the second, however the risk is lower on the off chance that the trade doesn't work out.

While trading option spreads, traders need to find a balance between the credit received and the risk they are taking on.

Features

• Strike width will frequently rely upon the value of the underlying security, with higher-priced underlyings relating width more extensive strike widths.
• Strike width alludes to the interval set between strike prices on a listed options series.
• Options spreads and their associated risk profiles will differ contingent upon their strike width.

FAQ

How is strike width utilized in options spreads?

Several types of options spread, for example, butterflies and condors, will have equidistant strike width by their inclination. For a vertical spread like a bull call spread, the strike width will likewise manage the cost of the spread as well as its expected profit or loss. The more extensive the strikes, the more costly it will be, however will likewise have a higher expected profitability.

For what reason do strikes have standard widths?

Listed options contracts are standardized across various metrics. These incorporate the contract size (e.g., equity options address 100 shares of stock), exercise terms (e.g., dates), and strike width, among different aspects. Standardization makes options simpler to list on exchanges, expanding liquidity and effectiveness of the market.

What's the most impenetrable strike width?

Generally, strikes $1.00 separated are the most secure accessible on most stocks. Due to stock splits or different events, you might have strikes that outcome in $0.50 or more tight.