Choosing wrong strike prices can lead to big losses even when our analysis is right. It's due to Theta decay. So Lets understand some basics of options strike price.
There are three types of strike prices based on their moneyness. 1)ATM (At the Money) 2)OTM (Out of the Money) 3)ITM (In the Money)
FOR CALL OPTIONS :
Lets assume Stock ABC is trading at 150 (spot price). Then, Spot price = 150 ATM Strike = 150
Any strike above spot price is OTM for call option. Ex : 160 ,170,180 etc.,
Any strike below spot price is ITM for call option. Ex : 140, 130, 120 etc.,
FOR PUT OPTIONS :
Stock ABC is trading at 150 (spot price). Spot price = 150 ATM Strike = 150
Any strike above spot price is ITM for put option. Ex : 160 ,170,180 etc.,
Any strike below spot price is OTM for put option. Ex : 140, 130, 120 etc.,
HOW TO CHOOSE THE STRIKE AMONG THE ABOVE THREE MONEYNESS
1)Follow a simple rule, Buy a strike price which is closer to the spot price. "OTM STRIKES ARE BIG NO" . 2) Remember! when we are buying an option, the stock / index needs to move up / down with a good momentum. So that our option will gain some value & we will be in profit. So it doesn't make sense to buy a OTM call / put. Because if a strike price is far away from spot price, it won't give us much movement due to time decay.
I have even shared my option strike rules as follow. Friday, Monday & Tuesday = ATM strikes Wednesday & Thursday = ITM strikes This is how I used to pick strikes for intraday. The reason is simple because, if we are closer to the expiry (Thursday) the effect of theta decay is very high. Due to which our premiums will not move much even if the stock / index has moved pretty well. By following these rules, our chances of losing money will drop drastically.
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