Choosing the Right Strike Prices for Credit Spreads: Delta, Probability, and Realistic Targets

🎯 Choosing the Right Strike Prices for Credit Spreads: Delta, Probability, and Realistic Targets

Mastering credit spreads means more than understanding puts and calls. It’s about choosing the right strike prices to balance risk, reward, and probability. The difference between a consistent trader and a frustrated one often comes down to one question:

“Am I choosing the right strikes for this market condition?”

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📌 Why Strike Selection Matters

• It determines your maximum profit and maximum risk
• It controls your breakeven price
• It directly affects your probability of profit (PoP)

Whether you’re selling a bear call or bull put spread, the strike pair you pick is the foundation of the entire trade.

📐 Key Metrics for Choosing Strikes

• Delta – Measures probability of being in-the-money at expiration
• Probability of Profit (PoP) – Broker-calculated estimate of trade success
• Open Interest – Shows liquidity at specific strikes
• Strike Width – Controls how much risk you take per spread

🧠 Using Delta to Pick the Short Strike

Delta ≈ Probability of expiring ITM. So, a 0.10 delta option has a ~10% chance of expiring in-the-money — or a 90% chance of staying out!

• ✅ 0.10 Delta: High probability (low credit)
• ⚖️ 0.20–0.30 Delta: Moderate risk/reward (balanced)
• 🔥 0.40+ Delta: Aggressive — lower PoP, higher potential reward

📊 Example

Stock XYZ @ $100

• Sell 95 Put (0.20 delta)
• Buy 90 Put (0.10 delta)

This bull put spread has a ~80% probability of profit and limited downside.

📈 How to Select Strike Width

Strike width controls risk. Wider spreads = more risk but potentially more credit. Narrow spreads = less risk, less reward.

• 📏 $1 width: Risk = $100 per contract (minus credit)
• 📏 $5 width: Risk = $500 per contract (minus credit)

For small accounts, $1–$2 spreads are ideal. They’re easier to manage, roll, and scale.

🔄 Balancing Credit vs Risk

You want to collect enough credit to justify the trade but not so much that your PoP drops too low.

Credit Received	Strike Width	Max Risk	PoP (Est.)
$0.20	$1.00	$80	~85%
$0.40	$1.00	$60	~75%
$0.70	$1.00	$30	~60%

⚠️ Red Flags When Picking Strikes

• 📉 Low Open Interest: Hard to get filled or exit easily
• 🧨 Too Close to Earnings: Volatility spike risk
• 📉 IV Collapse Expected: You’re short Vega — lower IV helps
• 💸 Too Wide a Spread Without Justification

📍 The 3-Question Strike Filter

1. Does this strike align with support/resistance?
2. Is the credit worth the risk?
3. Am I comfortable holding it to expiration?

📚 Real World Example: INTC Bull Put Spread

• INTC @ $20.69
• Sell 20.5 Put (delta 0.25)
• Buy 20.0 Put
• Net Credit = $0.125
• Max Risk = $0.375
• PoP ≈ 52%

A short-term trade with modest credit, defined risk, and decent liquidity.

✅ Final Thoughts

Strike selection isn’t random — it’s strategic. It’s the heartbeat of your credit spread. Choose wisely, and you’ll put time, volatility, and probability in your favor.

When in doubt, stick to this formula:

Low delta + decent credit + good chart structure = high-confidence setup

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Blog by Deno Trader • Visit: denotrading.com