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
Choosing strike prices is one of the most important decisions in credit spread trading. It determines how much risk you take, how much credit you collect, and how likely the trade is to succeed. Many traders focus heavily on strategy selection, but consistency often comes down to one simple question: are the strikes aligned with the market environment and your risk tolerance?
If you get strike selection wrong, even a good strategy will fail. If you get it right, credit spreads can become one of the most reliable tools in your trading arsenal.
Why Strike Selection Matters
Strike selection defines the entire structure of a credit spread. It controls your maximum profit, your maximum loss, and your breakeven price. More importantly, it directly impacts your probability of profit.
Whether you are selling a bull put spread or a bear call spread, the distance between price and your short strike is what gives you room to be wrong and still win the trade. Without that margin, small price movements can quickly turn a high-probability trade into a losing one.
The Key Metrics That Guide Strike Selection
There are a few core metrics that matter far more than anything else when choosing strikes.
Delta is the most commonly used. It represents the approximate probability that an option will expire in the money. A lower delta means a higher chance the option expires worthless, which is exactly what a credit spread seller wants.
Probability of profit, often calculated by brokers, provides a broader estimate of trade success based on the entire spread structure.
Open interest matters because it reflects liquidity. Strikes with low open interest are harder to enter and exit cleanly, especially during volatile conditions.
Strike width determines how much capital you put at risk. Wider spreads increase both risk and potential reward, while narrower spreads offer more control and flexibility.
Using Delta to Choose the Short Strike
Delta is one of the most practical tools available to options traders. As a rough guideline, delta can be interpreted as the probability that an option expires in the money.
A short option with a delta around 0.10 has roughly a 10 percent chance of expiring in the money, which means about a 90 percent chance of expiring worthless. That makes it a conservative choice, though the credit collected will be smaller.
Strikes with delta between 0.20 and 0.30 offer a more balanced trade-off between probability and premium. These are commonly used by traders looking for steady returns without taking excessive risk.
Once you move above 0.40 delta, the trade becomes aggressive. While the premium increases, the probability of profit drops sharply, and small adverse moves can quickly threaten the position.
For example, if a stock is trading at $100, selling the 95 put with a delta near 0.20 and buying the 90 put creates a bull put spread with a high probability of profit and clearly defined risk. This structure allows the stock to fall several dollars and still result in a profitable outcome.
Choosing the Right Strike Width
Strike width determines your maximum risk. A one-dollar-wide spread risks roughly $100 per contract minus the credit received. A five-dollar-wide spread risks about $500 per contract minus the credit.
Smaller accounts often benefit from one- or two-dollar-wide spreads. These are easier to manage, easier to roll, and allow traders to scale positions gradually without taking on outsized risk.
Wider spreads may offer higher credits, but they require stronger conviction and stricter risk controls. Without a clear edge, increasing width simply increases exposure.
Balancing Credit and Probability
The goal is not to collect the largest possible credit. The goal is to collect enough credit to justify the risk while maintaining a probability of profit that fits your trading plan.
A spread that collects twenty cents on a one-dollar-wide structure may have an estimated probability of profit near eighty-five percent. Increasing the credit to forty cents lowers risk per contract but often drops the probability closer to seventy-five percent. Pushing for even higher credit may reduce risk further but often comes at the cost of significantly lower win rates.
Consistency comes from finding a balance where wins occur frequently enough to offset the inevitable losses.
Common Red Flags When Choosing Strikes
Low open interest is a warning sign. Poor liquidity can trap you in a trade or lead to unfavorable fills.
Selling spreads too close to earnings exposes you to volatility spikes that can overwhelm probability-based setups.
Ignoring implied volatility can also hurt performance. Credit spreads benefit from stable or falling volatility. Entering trades when volatility is expected to collapse can help, while entering just before expansion can be dangerous.
Finally, widening spreads without a clear reason often increases risk without improving long-term results.
A Simple Three-Question Strike Filter
Before placing any credit spread, ask yourself three questions.
Does the short strike align with technical support or resistance?
Is the credit received worth the defined risk?
Am I comfortable holding this position through expiration if necessary?
If the answer to any of these is no, the trade likely needs adjustment.
Real-World Example
Consider a bull put spread on a stock trading around $20.70. Selling the 20.5 put with a delta near 0.25 and buying the 20.0 put creates a defined-risk position. The credit may be modest, but the structure offers reasonable probability and manageable downside.
This type of setup is common for short-term income trades where capital preservation matters more than aggressive returns.
Final Thoughts
Strike selection is not random. It is the foundation of every credit spread. The right strikes put probability, time decay, and market structure on your side. Poor strike selection does the opposite.
When unsure, keep it simple. Lower delta, reasonable credit, and clear chart structure tend to produce the most consistent results over time.