Option Strike Choice: Implied Volatility Versus Time Value

When you buy an option, part of its price slowly melts away every day, and that part is called time value.

Time value is made up of two pieces: how much time is left before the option expires, and implied volatility, which shows how much people think the price will move.

For options that expire on the same day, the time-left piece is exactly the same, so the real difference between strikes comes from implied volatility.

Strikes far above or below the current price usually have less time value, but people buying them in large numbers can push their implied volatility higher.

That is why picking a strike by time value is not always the same as picking one by implied volatility.

You can check this yourself by putting real option prices into a Black-Scholes-Merton calculator.

A good rule is to choose the strike with the lowest implied volatility among the three strikes closest to the current price, or the very next out-of-the-money strike.

This way, the option still has room to earn from price moves without losing too much to time decay.