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Choosing Option Strikes and Maturities by Liquidity

Article Quant Q&A · Author: BS.
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Summary

The document asks how traders should select strikes and expiries for option positions such as protective puts and volatility strangles, while expressing concern that choices based only on backtest performance may be overfit. The response offers a practical market constraint: when the strategy does not inherently require a particular strike or maturity, traders can favor the contracts already available and most liquid.

Using liquid options can reduce the cost of assembling a position in a market described as illiquid. The answer is brief and does not provide a framework for choosing a strike based on payoff goals, volatility views, or risk limits. Its liquidity guidance is therefore conditional; when a strategy’s design depends on strike or expiry, those requirements still shape the selection.

Key ideas

  • Option strike and maturity choices may be constrained by the strategy’s intended payoff.
  • When several contracts fit the strategy, liquid strikes and expiries can lower implementation costs.
  • Backtest-selected parameters may be vulnerable to overfitting.
  • The document offers liquidity as a practical selection criterion but does not provide a complete strike-selection method.

Tags

OptionsExecutionVolatility
Full text
# How do option traders choose the strikes and maturities?


# How do option traders choose the strikes and maturities?












How do option traders choose their strikes and maturities ? Like why would one roll XX% puts in their protection leg instead of YY% puts, or why choose specifically XX%/YY% as the strikes in a strangle to bet on volatility and not something else etc... I know there are some explanations like "it's the combination that yields the lowest mean delta" or "its the strategy that works the most" but for some reason I don't like them, it's too close to over fitting in backtesting.

## Answer by Sithered (score 1)

https://quant.stackexchange.com/a/29969

If the strategy does not depend on the maturity or strikes (which is rarely true), it is chosen with the available options in the market: the option market is very illiquid, so building a strategy will be a lot cheaper if you use the most liquid strikes/maturities

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.