For an options trader how important is the strike price?

The strike matters a lot because if you get the wrong strike then you get the wrong trade. Option trading in stocks and on indices is all about identifying the right strike price. The strike price is the price at which you contract to buy or sell a particular stock. For example, if the stock of Hindustan Unilever is quoting at Rs.1200, and if you are expecting a 5% increase in price, then you need to buy an HUVR call option with a strike price of 1220 or 1240. It is only in these strikes that you will get the best combination of intrinsic value and time value. On the contrary, if you choose to buy a 1340 call option just because the premium is negligible, then you are unlikely to make any money. Hence selection of the strike price is critical.

An important choice that you need to make when it comes to option strikes is whether you must go for an ITM option, ATM option or an OTM option. The second choice is what should be the maximum premium you should be willing to pay for a particular strike. While these are important choices, there is another important consideration that traders focus on. It tells how the concentration of strikes is changing and what it means for the market