What Does Strike Price in Options Means

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When you buy or sell an option, you’re entering into a contract with another person or entity that allows you to buy or sell something else – usually stocks, shares, currencies, commodities, or futures contracts – at an agreed-upon price within a specified period. The strike price is the basis of every options trade (but more on that later).

Types of Strike Price Options

There are three different kinds of strike prices:

  1. At-the-Money (ATM) strike price is an option with a strike price closest to (or equal to) where it’s currently trading.
  2. In-the-Money (ITM) strike price is an option with a strike price that’s higher than where it’s currently trading, i.e., there’s intrinsic value to holding that option.
  3. Out-of-the-Money (OTM) strike price is an option with a lower strike price than where it’s currently trading and does not have any intrinsic value.

When using either one of these strike prices for options trading, it’s important to remember that both pricing and trade-execution mechanisms are entirely separate from those used for traditional equities.

Extrinsic and Intrinsic Value

According to tastytrade, the price of an option is determined by two factors: time value and intrinsic value. The first is known as extrinsic value and it’s a result of changes in stock prices as well as volatility. Intrinsic value, on the other hand, comes from where you invest your capital if your investment moves in line with expectations.

Understanding Call and Put Prices

Calls and puts are both strike price options that convey to its owner a contract that gives them rights to buy or sell an underlying security at a specified price on or before a specific date. For example, consider XYZ stock. The current stock price is $50 per share.

The Strike Price is the Point at Which an Option Gains Value

This is a crucial factor of any option and ultimately determines whether or not it will be profitable for investors. Option gains value when stocks rise but loses their value when stocks fall. The value of options derives from two factors: how far away from current stock prices they are set at and how high stocks rise after being bought.

Strategies Using the Strike Price

So we know what a strike price is, but why is it so essential to option traders? This can be answered by understanding how investors use options. An investor will use three main strategies to maximize profit or limit risk: Long call, long put, and short call. When purchasing an option, you want to make sure you purchase them at a price below their market value.

Other Features of an Option Contract

A call is a right to buy 100 shares of an underlying stock at a specific price. A put is a right to sell 100 shares of an underlying stock at a specific price. The strike price, or exercise price, is what you must pay for either option (in addition to its premium). For example, if you own call options on IBM and set your strike price for $200, your broker will buy IBM stock for you if it drops below $200 before expiration.

The strike price of an option is one of its most important features and will have a significant impact on whether or not you are successful when trading. Be sure to educate yourself on what exactly it means, how it works, and where it comes from before entering into any trades.