Strike Width

DEFINITION of 'Strike Width'

The difference between the strike price of an option and the price of the underlying security. Strike width is most commonly associated with options strategies that include spreads, such as credit spreads or iron condors.

BREAKING DOWN 'Strike Width'

The price of an option depends on several factors, including the price of the underlying asset, the implied volatility of the option, the length of time until expiration, and the interest rate. The strike price of the option is the price set by the option seller, and represents the price at which a put or call option can be exercised at. Investors selling options want to ensure that the strike price they choose will maximize their probability for profit.

Strike width matters in options trading strategies that rely on a spread, such as credit spreads or iron condors. The larger the strike width, the more risk that the option seller is taking on. The probability of profit is greater for an option with a larger strike width than one with a smaller strike width. Increasing the strike width can improve an investor’s profitability, though this can also lower the return on capital.

An option buyer takes note of the strike width because it determines the price at which the option holder can buy or sell the underlying security in the future. Option sellers look at the strike width to determine the premium they would receive from selling the option.

An in-the-money (ITM) option for calls will be below the price of the underlying security, and for an ITM put, the strike price will be above the price of the underlying. For at-the-money (ATM) options, the strike price is more or less equal to the price of the underlying. Out-of-the-money (OTM) puts will have a strike price below the underlying, while OTM calls will have a strike price above the underlying.