LEARN HOME / LESSON 2
The 30% distance rule
This working rule asks for a strike at least 30% below the current share price. It creates distance. It does not create safety.
The calculation
ILLUSTRATION A share trades at $63.
| Step | Calculation | Result |
|---|---|---|
| Find 70% of spot | $63 × 0.70 | $44.10 |
| Test a $45 strike | $45 sits above $44.10 | Fail |
| Test a $42.50 strike | $42.50 sits below $44.10 | Pass this one rule |
A passing strike moves to the next check. It still needs a fresh premium, enough cash, manageable spread and liquidity, no uncleared event, and a concentration check.
Strike distance and break-even differ
Strike distance measures how far the strike sits below spot. Break-even includes premium. Keep the two ideas separate.
| Illustration | Strike distance | Premium | Break-even |
|---|---|---|---|
| $100 spot / $70 strike / $2 premium | 30% | $2 per share | $68 before costs |
| $100 spot / $72 strike / $4 premium | 28% | $4 per share | $68 before costs |
Both examples have the same break-even before costs. Only the first passes the strict 30% strike-distance rule. Premium does not rescue a strike that fails the rule.
Two clear failures
- A $70 share with a $50 strike: the strike sits only 28.6% below spot. Reject it under this rule.
- A $150 share with a $110 strike: the strike sits only 26.7% below spot. Reject it under this rule.
A $200 share has a $145 strike. Does it pass the 30% distance rule?
No. Seventy per cent of $200 is $140. A passing strike must sit at or below $140. The $145 strike is only 27.5% below spot.
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