Strike Selection Explained (Delta, $ OTM, % OTM, Trade Price, Strike Offset)

When creating an auto trader in Options Auto Trader, one of the most important decisions you'll make is how the bot selects the option strikes to trade. Strike selection can be customized using several methods, including Delta, $ OTM, % OTM, Trade Price, and Strike Offset. Each method offers a different approach to choosing option strikes based on your trading strategy. This article explains how each method works and when to use them.

Step 1: Strike Selection Methods Overview

When setting up your auto trader, you need to choose how the system selects option strikes. The available methods are:

Delta: Selects based on the delta of the option contract.
$ OTM: Chooses a strike that is a specific dollar amount out of the money.
% OTM: Picks a strike that is a certain percentage out of the money.
Trade Price: Selects a strike where the option’s mid price is closest to a specified price.
Strike Offset: Chooses a strike based on a dollar distance from a prior strike.

Each method provides flexibility in tailoring your strike selection to match different market conditions and strategies.

Step 2: Delta Strike Selection

The Delta method selects an option strike based on the delta of the contract. Delta measures how much the option’s price is expected to change for every $1 movement in the underlying asset. A higher delta (closer to 1) means the option price moves more closely with the underlying asset.

Example:

If you set delta to 0.30, the auto trader will pick a strike with a delta of approximately 0.30. This is a common strategy for options sellers, as options with lower delta are further out of the money and have a lower chance of being assigned.

When to use: Delta-based selection is great for traders who want precise control over how sensitive the option is to the underlying asset’s price movement.

Step 3: $ OTM (Dollar Out of the Money)

The $ OTM method selects a strike based on a specific dollar amount out of the money (OTM). Out of the money means the strike price is further from the current price of the underlying asset, reducing the likelihood of assignment for sellers.

Example:

If the current price of the underlying stock is $100 and you set $50 OTM, the auto trader will pick a strike price that is $50 below (for puts) or above (for calls) the current price, at $50 OTM.

When to use: Use this method if you want to control the strike selection by specifying a fixed dollar distance away from the underlying asset price.

Step 4: % OTM (Percentage Out of the Money)

The % OTM method selects a strike that is a specific percentage out of the money, based on the current price of the underlying asset.

Example:

If the current price of the underlying stock is $200 and you set 10% OTM, the auto trader will select a strike that is 10% away from the current price. For a put option, this would be $180 (10% lower), and for a call option, it would be $220 (10% higher).

When to use: This method is useful if you prefer to keep your strike selection relative to the current price, regardless of market fluctuations.

Step 5: Trade Price

The Trade Price method selects an option strike where the mid price of the option is closest to the price you set. The mid price is the average of the bid and ask prices for the option.

Example:

If you set the Trade Price to $2, the auto trader will find the strike where the option’s mid price is closest to $2.

When to use: Use this method if you prefer to enter trades based on the option’s price rather than its strike distance. This can be helpful when managing risk/reward based on premium received.

Step 6: Strike Offset

The Strike Offset method selects a strike that is a specific dollar distance from a prior strike. This is useful when trading strategies like spreads, where you want the strikes of your options to be a set distance apart.

Example:

If you set a $5 Strike Offset, the auto trader will choose a strike that is $5 below or above the prior one, depending on whether you are trading calls or puts.

When to use: This method is best for spread strategies where you want consistent spacing between strikes, such as credit spreads or iron condors.

Conclusion

Choosing the right strike selection method is essential for aligning your auto trader with your trading strategy. Whether you prefer using Delta, $ OTM, % OTM, Trade Price, or Strike Offset, each method offers a tailored approach to selecting the best option strikes for your trades.

If you have any questions about configuring strike selection or need further assistance, feel free to contact our support team.