What Is Strike Width?
Strike width is the regular distance between the strike prices of the options listed on various securities. For instance, options may be listed on a stock with a strike width of $2.50 between strikes, while another may have a strike width of $1.00, and others $10.00 (for instance, in the case of a large stock index).
- Strike width refers to the interval set between strike prices on a listed options series.
- Options spreads and their associated risk profiles will vary depending on their strike width.
- Strike width will often depend on the value of the underlying security, with higher-priced underlyings corresponding width wider strike widths.
How Strike Width Works
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. For a buyer though, the potential for greater profits exists with a larger strike width compared to one with a smaller strike width. Increasing the strike width can improve an investor’s upside potential, though generally, this means there is more of an upfront cost to the spread.
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 interest rates. The strike price of the option represents the price at which a put or call option can be exercised. Investors selling options want to ensure that the strike price they choose will maximize their probability for profit.
Strike Width Example
Let's say an investor wants to sell a call spread in MSFT, which is trading at $100. The trader decides to sell 1 MSFT March 100 strike call and buy 1 MSFT March 110 strike call. The strike width is 10, which is calculated as 110 - 100. For this trade, the investor will receive credit since the call being sold is at the money and therefore has more value than the out-of-the-money (OTM) option being bought.
Now, consider if the trader sold the 100 call and buys a 130 call. The strike width is 30. Assuming the same number of options are traded (as in scenario one), the credit received will increase substantially, since the bought call is even further out of the money and costs less than the 110 strike option. The risk on the trade has also increased substantially for the seller in the second scenario. The max risk in both scenarios is the width of the spread minus the credit received.
In the second scenario, the premium received is greater, so the potential profit is larger than the first, but the risk is larger if the stock keeps heading higher. The first scenario has a smaller premium received than the second, but the risk is lower if the trade doesn't work out.
When trading option spreads, traders need to find a balance between the credit received and the risk they are taking on.
Why do strikes have standard widths?
Listed options contracts are standardized across a variety of metrics. These include the contract size (e.g., equity options represent 100 shares of stock), exercise terms (e.g., dates), and strike width, among other dimensions. Standardization makes options easier to list on exchanges, increasing liquidity and efficiency of the market.
What's the tightest strike width?
Generally, strikes $1.00 apart are the tightest available on most stocks. Due to stock splits or other events, you may have strikes that result in $0.50 or tighter.
How is strike width used in options spreads?
Several types of options spread, such as butterflies and condors, will have equidistant strike width by their nature. For a vertical spread like a bull call spread, the strike width will also regulate the cost of the spread as well as its potential profit or loss. The wider the strikes, the more expensive it will be, but will also have a higher potential profitability.