OTM CE and PE Strike Selection in Nifty Options: Complete Guide
Choosing the right strike price is one of the most important decisions in options trading. Pick a strike too far away and your option may never move. Pick one too close and you may pay more premium than needed. In this guide you will learn how to select OTM CE (Call) and OTM PE (Put) strikes in Nifty and Bank Nifty using simple, repeatable methods.
Table of Contents
- What is an OTM option?
- OTM CE vs OTM PE explained
- Why traders choose OTM strikes
- 5 methods to select OTM strikes
- Worked example with levels
- Strike selection for buyers vs sellers
- Common mistakes to avoid
- Quick strike selection checklist
- Frequently asked questions
What is an OTM (Out of the Money) option?
An option is called Out of the Money (OTM) when exercising it right now would not give any profit. Such an option has zero intrinsic value. Its entire premium is time value, which keeps shrinking as expiry comes closer. This decay is called theta.
OTM CE vs OTM PE explained
| Point | OTM CE (Call) | OTM PE (Put) |
|---|---|---|
| Strike position | Above current market price | Below current market price |
| Buyer's view | Expects market to rise | Expects market to fall |
| Seller's view | Expects market to stay below the strike | Expects market to stay above the strike |
| Intrinsic value | Zero | Zero |
| Acts like | A resistance-side reference | A support-side reference |
Why traders choose OTM strikes
- Lower premium: OTM options cost less, so capital required is smaller.
- Higher percentage return potential: A small move can change the premium sharply if the move is fast.
- Defined distance for sellers: Sellers collect premium while keeping a buffer between the market and their strike.
- Hedging: Far OTM options are used as low-cost hedges in spreads and strangles.
5 methods to select OTM strikes
Method 1: Expected move using India VIX
India VIX tells you how much movement the market is pricing in. You can convert it into an approximate range until expiry.
Example: Suppose Nifty is at 24,000, India VIX is 14 and expiry is 7 days away.
Expected Move = 24,000 x 0.14 x √(7/365) ≈ 24,000 x 0.14 x 0.1385 ≈ 465 points.
So the market is pricing a one-standard-deviation range of roughly 23,535 to 24,465.
- Sellers generally choose OTM CE and PE strikes outside this range.
- Buyers should remember that the market has already priced this move into the premium, so they need a move bigger than expected to profit.
Method 2: Delta based selection
Delta shows how much the option price changes for a 1 point move in the index. It also gives a rough idea of the probability of finishing in the money.
| Approx. Delta | Rough meaning | Typical use |
|---|---|---|
| 0.40 to 0.30 | Slightly OTM | Directional buying |
| 0.25 to 0.15 | Moderately OTM | Spreads, moderate risk selling |
| 0.10 or below | Far OTM | Hedges, conservative selling |
Method 3: Support and resistance levels
Pick OTM strikes around levels where price has reacted before.
- OTM CE: at or above a strong resistance or previous swing high.
- OTM PE: at or below a strong support or previous swing low.
Method 4: CPR (Central Pivot Range) levels
CPR gives ready-made levels for the day, week or month. Traders commonly map them like this:
- Above CPR and moving up: watch R1, R2 for OTM CE reference.
- Below CPR and moving down: watch S1, S2 for OTM PE reference.
- Narrow CPR often hints at a trending move, so distance from strikes matters more.
New to CPR? Learn the full concept in our CPR courses at Trading Direction.
Method 5: Open Interest (OI) walls
Strikes with very high Call OI often act as resistance, and strikes with very high Put OI often act as support. Read our guide on PCR and Open Interest analysis to combine OI data with your strike selection.
Worked example with levels
Let us use illustrative numbers (not a trade recommendation). Assume Nifty is trading at 24,000 and the weekly expected move is about 465 points.
| Item | Level | How it was chosen |
|---|---|---|
| Spot | 24,000 | Current market price |
| Upper expected range | 24,465 | Spot + expected move |
| Lower expected range | 23,535 | Spot - expected move |
| OTM CE strike | 24,500 | First strike just outside upper range |
| OTM PE strike | 23,500 | First strike just outside lower range |
A seller of a strangle might sell 24,500 CE and 23,500 PE, ideally with hedges further out. A buyer who expects a breakout above resistance might instead look at a 24,100 or 24,200 CE, which is closer to the market and has better delta.
Strike selection for buyers vs sellers
| Factor | Option Buyer | Option Seller |
|---|---|---|
| Preferred distance | ATM to 2-3 strikes OTM | Outside expected move |
| Main risk | Time decay and losing the full premium | Sharp moves against the position |
| Best environment | Trending, breakout days | Range-bound, high-VIX-then-falling days |
| Risk control | Fixed premium stop loss | Hedges and strict stop loss |
Common mistakes to avoid
- Buying far OTM "lottery" options every day hoping for a big move.
- Ignoring time to expiry. Weekly options decay much faster near expiry.
- Selling naked OTM options without hedges and without a stop loss.
- Not checking liquidity. Wide bid-ask spreads increase your real cost.
- Overtrading on expiry day without a clear plan.
- Ignoring events such as results, RBI policy, Budget or global news.
Quick strike selection checklist
- Is my view directional, or am I expecting a range?
- What is India VIX and what is the expected move till expiry?
- Where are the CPR, support, resistance and OI levels?
- Is the option liquid with a tight bid-ask spread?
- What is my maximum loss, and is it within my risk limit?
- Do I have an exit plan for both profit and loss?
Frequently asked questions
What is OTM CE and OTM PE?
OTM CE is a Call option with a strike above the current market price. OTM PE is a Put option with a strike below the current market price. Both have zero intrinsic value and contain only time value.
How far OTM should I select a strike?
There is no single correct distance. Buyers usually stay 1 to 3 strikes OTM for better probability, while sellers often choose strikes outside the expected move calculated from India VIX. The right distance depends on your strategy, time to expiry and risk capacity.
How do I calculate the expected move of Nifty?
Expected move = Spot x (India VIX / 100) x square root of (days to expiry / 365). This gives an approximate one standard deviation range, which the market prices in about 68 percent of the time.
Are far OTM options good for beginners?
Far OTM options look cheap but lose value quickly and expire worthless most of the time. Beginners are better off learning with limited-risk, defined strategies and small position sizes.
Can I use CPR to select OTM strikes?
Yes. CPR levels such as TC, BC, R1, S1 and higher pivots act as reference support and resistance zones. Many traders pick OTM CE strikes near or above resistance levels and OTM PE strikes near or below support levels.
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Explore Courses at Trading DirectionDisclaimer: This article is for educational purposes only and is not investment advice. Trading in options involves substantial risk of loss. All levels and numbers shown are illustrative examples. Please consult a SEBI-registered advisor before making trading decisions.