How Does the Choice of Strike Price Interact with Basis Risk?
The strike price determines the option's delta, which directly impacts the hedge ratio and effectiveness. A deep in-the-money (ITM) option has a delta closer to 1, providing a more stable, futures-like hedge with lower basis risk.
An out-of-the-money (OTM) option has a low delta, meaning the hedge is less effective initially and has higher basis risk.
