The Strike Price Decision

Every LEAPS trader faces the same question: which strike should I buy? Go too deep in-the-money and you tie up excess capital. Go too far out-of-the-money and you need a massive stock rally to profit. The right strike depends on your strategy, risk tolerance, and outlook.

The Three Strike Zones

Deep in-the-money (20-30% below stock price):

  • Delta: 0.75-0.90
  • Cost: High (most of the premium is intrinsic value)
  • Time value at risk: Low
  • Breakeven: Close to current stock price
  • Best for: Stock replacement, PMCC strategy

    • At-the-money (near current stock price):

  • Delta: 0.45-0.55
  • Cost: Moderate (roughly 50/50 intrinsic and time value)
  • Time value at risk: High
  • Breakeven: Significantly above current stock price
  • Best for: Directional bets with moderate leverage

    • Out-of-the-money (10-20% above stock price):

  • Delta: 0.20-0.40
  • Cost: Low (entirely time value)
  • Time value at risk: 100% of premium
  • Breakeven: Well above current stock price
  • Best for: High-conviction speculative plays

    • The Breakeven Framework

    Before choosing a strike, calculate the breakeven price and ask yourself whether you believe the stock will reach that level.

    Breakeven = Strike Price + Premium Paid

    Example on NVDA at $135:

    | Strike | Premium | Breakeven | Stock Appreciation Needed | $105 (deep ITM)$38$143+5.9% $135 (ATM)$22$157+16.3% | $160 (OTM) | $10 | $170 | +25.9% |

    The deep ITM LEAPS only needs a 5.9% stock increase to break even. The OTM LEAPS needs a 25.9% increase. Over 18 months, 5.9% is highly achievable for a growing company. 25.9% is possible but less certain.

    Strike Selection by Strategy

    For stock replacement: Go deep ITM. You want the highest delta possible so the LEAPS tracks the stock closely. The $105 strike in the NVDA example captures roughly 85 cents of every dollar move. Cost is higher, but the probability of profit is also much higher.

    For the PMCC strategy: Deep ITM is essential. Your LEAPS needs to have a breakeven below where you sell short calls. If your breakeven is $143 and you sell monthly calls at the $145 strike, you have a $2 buffer. If your breakeven is $157, you cannot sell calls below that without risking a net loss on assignment.

    For a directional bet with leverage: ATM or slightly ITM. You accept higher risk for more leverage. If NVDA rallies 30%, the ATM LEAPS might return 100%+ while the deep ITM LEAPS returns 50%.

    For speculation: OTM, but understand you are likely to lose the full premium. Only use money you can afford to write off completely.

    Adjusting for Implied Volatility

    When IV is high, all strikes are more expensive, but ATM options are most affected. Deep ITM options are least affected since most of the value is intrinsic. If you are buying LEAPS during a high-IV environment (VIX above 25), favor deeper ITM strikes to minimize inflated time value.

    Practical Selection Process

  • Determine your strategy (stock replacement, PMCC, directional bet, or speculation)
  • Calculate breakevens for 3-4 different strikes
  • Assess whether the stock realistically reaches each breakeven in 18 months
  • Compare the time value component of each strike
  • Check bid-ask spreads at each strike (deeper ITM sometimes has wider spreads)
  • Use OptionsPilot's options data to compare delta, theta, and breakeven across strikes on your target stock

    • The Most Common Mistake

    Buying cheap OTM LEAPS because the dollar amount feels small. A $10 OTM LEAPS call ($1,000 per contract) feels like less risk than a $38 deep ITM LEAPS call ($3,800 per contract). But the $10 call has a much higher probability of expiring worthless. In expected value terms, the deep ITM LEAPS is often the better risk-adjusted trade.

    Choose your strike based on probability of profit and strategy fit, not on the sticker price of the option.