# Selecting Strike Prices on Option Spreads: Part 2

## In this follow-up article we’ll highlight additional considerations for selecting strike prices on a bull call spread.

• In-the-money (ITM) strikes: The underlying price is above the call strike price. ITM options are the most expensive and the price is made up of a combination of both intrinsic value and extrinsic value (also known as time-value). The Delta typically ranges from 0.51-1.00, which means that there is a greater than 50% chance that the call will close in-the-money at expiration.
• At-the-money (ATM) strikes: The underlying price is around the call strike price. The option price is made up entirely, or nearly entirely, of time-value. Because ATM options have the most time value, they also have the highest rate of time decay (expressed in the option Greek known as “Theta”), relative to ITM or OTM options. The Delta is around 0.50, which means that there is roughly a 50% chance that the call will close in-the-money at expiration. Note: The ATM strike does not necessarily need to equal the underlying price, it is often the strike price that is closest to the underlying price.
• Out-of-the-money (OTM) strikes: The underlying price is below the call strike price. OTM options are the cheapest and the price is made up entirely of time value. The Delta typically ranges from 0.01-0.49, which means that there is a less than a 50% chance that the call will close in-the-money at expiration.

Source: StreetSmart Edge

Using the option chain above as an example, we can make the following observations:

• All of the ITM options have Delta’s above 0.50. Therefore, if you select an ITM strike for the long leg of a bull call spread, statistically speaking there is a greater than 50% chance that it will close in the money at expiration.
• The price of the ATM strike is made entirely of time value (\$1.13 x \$1.20 in this example) and has the highest rate of time decay (Theta is -0.0106). Therefore, if you select the ATM strike for the short leg of a bull call spread you will have a slightly positive Theta on the combined position, which means time is working in your favor, all other things being equal.

Before initiating any bullish option strategy, the single most important factor in determining whether or not you will achieve a profit is whether or not your forecast is accurate on the underlying stock, ETF or index. While you don’t need to have an exact price target in mind, you should have an idea of which direction you think the price is going and an estimated timeframe for that potential move to occur. Tying this factor into bull call spread strike price selection, ask yourself, “how much do I expect the underlying price to (reasonably) rise”? If the answer is say 4-5%, then consider selecting a short strike price that is around 4-5% above the current underlying price, or perhaps a little less in case your forecast is too optimistic.

In regards to selecting an expiration date, ask yourself how long you expect it to take for the potential move to take place and consider adding another week or two in case the move takes longer than you anticipated.