Most Options Traders Obsess Over Strike Selection. Mike Butler Says It Barely Matters.

Key Concepts

• Strike Price: The predetermined price at which an option holder can buy (call) or sell (put) the underlying asset. It defines the threshold for intrinsic value.
• Intrinsic Value: The portion of an option's price that is "in-the-money," representing the difference between the strike price and the current market price of the underlying asset.
• Liquidity: The ease with which an asset can be bought or sold without significantly affecting its price.
• Bid-Ask Spread: The difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept.
• Slippage: The difference between the expected price of a trade and the price at which the trade is actually executed.
• Open Interest: The total number of outstanding option contracts that have not been settled.
• Dynamic vs. Static Delta: Call options have dynamic delta (changing sensitivity to the underlying price), whereas owning the underlying stock provides a static delta.

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1. Understanding Strike Prices

The strike price is the critical threshold for risk and reward.

• For Buyers: The strike price determines where you begin to capture intrinsic value gains.
• For Sellers: The strike price determines where you assume the risk of the underlying asset.
• Capital Efficiency: Buying a call option requires significantly less capital than buying 100 shares of the underlying stock, though the option has a finite expiration, whereas stock ownership is theoretically infinite.

2. Strike Selection Strategy

The speaker argues against "hyper-focusing" on the exact strike price, suggesting that the difference between adjacent strikes (e.g., 300 vs. 305) is often negligible in terms of overall trade probability. Instead, he emphasizes the following guidelines:

• Prioritize Monthly Cycles: Stick to monthly expiration cycles rather than weekly or near-term cycles. Institutional investors and high-volume traders congregate here, ensuring higher liquidity.
• Liquidity and Bid-Ask Spreads: Always check the bid-ask spread. A narrower spread reduces slippage, which is vital for traders executing hundreds of trades per year.
• Avoid "Wonky" Strikes: Favor round numbers (e.g., 285, 290) over fractional or non-standard strikes (e.g., 292.5), as market participants gravitate toward round numbers, leading to better liquidity.
• The Exception (Earnings): The only time the speaker deviates from monthly cycles is during earnings announcements, where he may trade within the specific earnings cycle to capture implied volatility.

3. Risk Management and Flexibility

A core argument presented is that for undefined risk trades (like short puts), the exact strike is less important because the trade will likely require active management.

• Trade Manipulation: The speaker notes that 90% of the time, he will need to "manipulate" or adjust the trade (e.g., rolling the option out in time or adjusting the strike) as market conditions change.
• Rolling: If a trade is tested, the trader can buy back the current option and sell a new one in a later expiration cycle to collect more premium and gain "breathing room."
• Defined vs. Undefined Risk: While he is flexible with undefined risk trades, he notes that defined risk trades (like Iron Condors) require more careful strike selection because they offer less room for adjustment once the trade is placed.

4. Notable Quotes

• "I don't get over-interested in the exact strike that I'm choosing, but I do have a couple of guidelines when it comes to strike selection."
• "If you're giving up 10 cents every single time you trade because you're in these illiquid markets, that adds up over time."
• "I would much rather have an assumption on a product... I would rather just go with the trade, go with my gut because I know that 90% of the time I'm going to be manipulating these trades anyways."

5. Synthesis and Conclusion

The main takeaway is that strike selection should be driven by liquidity and efficiency rather than an exhaustive search for the "perfect" price. By focusing on monthly cycles and round-number strikes, traders minimize slippage and ensure they can enter and exit positions easily. Because most trades require ongoing management and adjustment, the initial strike choice is secondary to the trader's ability to manage the position dynamically as market conditions evolve.