The NSE offers strike schemes on option contracts on each underlying available for trading in the futures and options (F&O) segment. NSE continually revises these strike schemes. It recently issued a circular announcing such a change. This week, we discuss whether such changes to strike schemes impact retail traders.
Strike location
Choosing a strike is a trade-off among three variables: time value, liquidity and probability of an option ending in-the-money (ITM). Suppose you want to pay less for time value in absolute terms. You may decide to choose ITM strikes. Note that time value is a residual factor that is determined by backing out intrinsic value from the option price. So, greater demand for a strike will push its price up, increasing its time value. Argued the other way, if ITM options have lower time value compared to out-of-the-money (OTM) options of the same expiry, then it must mean they are less liquid. You could also buy deep OTM options if you want to pay less absolute time value. But these options have lower probability of ending ITM. That means you are more likely to lose money than gain from buying these options. Why? Note that time value of an option must become zero at expiry. So, paying for time value is a loss that must be offset by delta gains. These delta gains can come from an OTM strike becoming ITM, offering gains from intrinsic value. Or it can be from an OTM strike that becomes at-the-money (ATM) quickly. In both cases, the position of the strike in relation to the underlying price is important.
There is an optimal trade-off between time value, liquidity and probability of an option ending ITM. You should choose between three strikes that are immediate OTMs. These strikes will carry good liquidity as determined by the change in open interest. They also have a good chance of ending ITM if the underlying moves in the directional of your trade. The price you must pay for obtaining these factors is time value, which will be higher in absolute terms than deep OTM strikes.
The upshot? It may not matter how many strikes the NSE offers on an underlying at a given point in time. What matters to you when initiating a long position is the immediate three OTM strikes. It is important to bear in mind that the liquidity argument relates primarily to European options.
Optional reading
Professional traders may be interested in the number of strikes offered. They typically take short positions to capture time decay. Options that are deep OTM often expire worthless. So, these traders short deep OTM options against long futures or long option positions. In other words, strike schemes are more relevant for shorts than for longs. But if shorts sell, who buys such strikes? Perhaps, retail traders who do not necessarily consider the probability of an option ending ITM or who are overly optimistic of delta gains.
(The author offers training programmes for individuals to manage their personal investments)
Published on September 27, 2025