How to Choose Strike Prices for Vertical Spreads

Summary

Strike selection is the single most important decision in any vertical spread. The strikes you choose determine your probability of profit, risk-reward ratio, and capital at risk. This guide provides a framework for selecting strikes using delta, technical analysis, and spread width considerations.

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Two traders can both open a bull call spread on the same stock at the same time and get completely different results based solely on which strikes they chose. One trader picks aggressive at-the-money strikes needing a big move. The other picks conservative in-the-money strikes that profit even if the stock barely moves. Strike selection is where the real edge lives.

The Delta Framework

Delta is the most reliable starting point for strike selection because it approximates the probability that an option will expire in the money.

For credit spreads (bull put, bear call):

  • Conservative: Sell the 15-20 delta strike. Roughly 80-85% probability of expiring worthless (your goal). Lower premium but higher win rate.
  • Moderate: Sell the 25-30 delta strike. About 70-75% probability of profit. Better premium, still favorable odds.
  • Aggressive: Sell the 35-40 delta strike. Around 60-65% probability of profit. High premium but you're almost flipping a coin on direction.

    • For debit spreads (bull call, bear put):

  • Conservative: Buy the 55-60 delta strike (slightly in the money). Higher cost but the stock doesn't need to move much.
  • Moderate: Buy the 45-50 delta strike (at the money). Standard setup requiring modest directional movement.
  • Aggressive: Buy the 30-35 delta strike (out of the money). Cheap but needs a significant move to profit.

    • Using Technical Levels

    Delta gives you a probability-based starting point, but technical analysis refines it. Place your short strike behind a meaningful support or resistance level:

    Credit spreads: Sell your short put below a clear support level, or sell your short call above strong resistance. This way, the stock has to break through a technical level before threatening your trade.

    Debit spreads: Buy your long option near the current price and place your short strike at or beyond a technical target. If you believe MSFT will rally to $430 resistance, a $420/$430 bull call spread aligns your max profit zone with that target.

    Key levels to watch:

  • 50-day and 200-day moving averages
  • Prior swing highs and lows
  • Volume-weighted average price (VWAP)
  • Round numbers (stocks often stall at $100, $200, $500, etc.)

    • Spread Width: How Far Apart

    The distance between strikes determines your max profit, max loss, and capital at risk.

    Narrow spreads ($1-$2 wide):

  • Lower capital at risk
  • Higher win rate on credit spreads (less room to be wrong)
  • Lower absolute profit
  • Higher commission impact as a percentage

    • Medium spreads ($5-$10 wide):

  • Balanced risk-reward
  • Most popular among retail traders
  • Reasonable commission impact
  • Good for stocks in the $50-$300 range

    • Wide spreads ($15-$25 wide):

  • Higher absolute profit potential
  • Lower win rate
  • More capital at risk
  • Commission impact is minimal percentage-wise

    • Rule of thumb: Your spread width should be proportional to the stock price. A $5-wide spread on a $50 stock is 10% of the stock price—that's wide. A $5-wide spread on a $500 stock is 1%—that's narrow. Aim for spread widths between 2-5% of the stock price for a reasonable balance.

    Putting It Together: A Selection Process

  • Determine your directional bias and confidence level. Strong conviction → more aggressive strikes. Mild lean → conservative strikes.
  • Pick an expiration. 30-45 DTE for standard trades, 14-21 DTE for higher-theta plays.
  • Identify the short strike using delta. Start with 25-30 delta for credit spreads, 50 delta for debit spreads.
  • Check technical levels. Adjust the short strike to sit behind support/resistance if it's close.
  • Select spread width. 2-5% of stock price, adjusted for your risk tolerance.
  • Evaluate the risk-reward ratio. Credit spreads should offer at least 1:3 reward-to-risk (e.g., $1.00 credit on a $3.00 risk). Debit spreads should offer at least 1:1.

    • OptionsPilot's strike finder lets you filter options by delta range and displays probability of profit alongside premium for each strike, streamlining steps 3-6 into a single screen.

    Adjusting for Implied Volatility

    When IV is high, options premiums are inflated. Credit spreads collect more premium (good) but the stock is expected to move more (bad). Consider going wider on your strikes or further out of the money.

    When IV is low, premiums are compressed. Debit spreads are cheaper (good) but credit spreads don't pay much. Consider narrower spreads or closer-to-the-money strikes to maintain a reasonable premium.