Choosing a Strike
How strike selection trades immediate premium against retained upside.
#The central tradeoff
A lower strike transfers more upside to the call buyer and therefore generally commands more premium, all else equal. A higher strike retains more upside but generally receives less premium.
#Illustrative strike comparison
| Strike | Upside retained before cap | Relative premium tendency | Primary tradeoff |
|---|---|---|---|
| K = $190 | $10 per share | Generally highest of the three | More premium; less rally participation |
| K = $200 | $20 per share | Generally between | Balanced middle case |
| K = $220 | $40 per share | Generally lowest of the three | Less premium; more rally participation |
#A disciplined strike decision
- Define the price at which surrendering further upside is acceptable.
- Compare net premium after all costs, not gross headline premium.
- Consider corporate actions and distributions during the term.
- Stress-test a large rally as well as a decline.
- Verify whether the position can be closed or adjusted before expiry.