What Is Strike Price?

what is the strike price

So they bought a call option with a $680 strike price trading for $53 per contract. An option’s strike price is preset by the exchanges, and often comes in increments of $2.50, though it may come in increments of $1 for high-volume stocks. So a normal-volume stock might have options with strikes at $40, $42.50, $45, $47.50 and $50, while a high-volume stock could have strikes at every dollar increment from $40 to $50, for example. Now that you know the factors to consider when choosing a strike price, here are a few steps to help you select the right strike price for your options trades.

In options trading, terms such as in-the-money, at-the-money and out-of-the-money describe the moneyness of options. Options trading can be an attractive investment strategy, because if done correctly, you can potentially make money when a stock is going down as well as when it goes up. Because they paid $53 for the option, the stock would need to trade for more than $733 for the trade to be profitable.

If you’re interested in building a portfolio that includes more than stocks, mutual funds or bonds, options trading is an investment alternative you might consider. Trading options involves purchasing contracts that give you the right to buy or sell an underlying security or commodity at a given time. Knowing what it is and how it works is central to a successful options trading strategy. If you want more hands-on guidance in trading options, consider matching with an expert financial advisor. An option's strike price tells you at what price you can buy (in the case of a call) or sell (for a put) the underlying security before the contract expires. The difference between the strike price and the current market price is called the option's “moneyness,” a measure of its intrinsic value.

Strike Price Options

Moneyness is the value of a financial contract if the contract settlement is financial. More specifically, it is the difference between the strike price of the option and the current trading price of its underlying security. So, for example, whether you should buy a call option or a put option depends on whether you think the asset’s price will rise or fall over time.

  1. Many low-risk options strategies revolve around selling options that will eventually be out of the money.
  2. The strike price indicates the predetermined price at which an option can be bought or sold when it's exercised.
  3. Let’s assume we want to trade the March 2014 options; for the sake of simplicity, we ignore the bid-ask spread and use the last trading price of the March options as of Jan. 16, 2014.
  4. When you trade options, you’re not buying shares of stock, bonds or other securities.

Buyers of call options may purchase the underlying security at the strike price while buyers of put options may sell the underlying security at the strike price. If GE closes at $28.50 when the options expire in March, Carla’s GE shares would be called away at the $27 strike price. Since she has effectively sold her GE shares at $27, which is $1.50 less than the current market price of $28.50, her notional loss on the call writing trade equals $0.80 less $1.50, or – $0.70. In that case, Carla’s GE shares would be called away at the $27 strike price. Writing the calls would have generated her net premium income of the amount initially received less the difference between the market price and strike price, or $0.30 (i.e., $0.80 less $0.50).

Before expiration, the holder of an option may exercise their right to buy or sell shares at the strike price. However, they would only exercise the right if it is financially advantageous. An option's strike price is the price at which the underlying asset will be bought or sold if the option is exercised. All option chains include contracts with multiple strike prices and expirations. When it comes to options, strike prices are key in determining the value of an option and the potential for profit or loss. The strike price is the price at which the underlying asset, such as a stock or a commodity, can be bought or sold by the option holder.

What is a Strike Price?

OTM calls have the most risk, especially when they are near the expiration date. If OTM calls are held through the expiration date, they expire worthless. Finally, don’t think that you make money only when an option is in the money. Many low-risk options strategies revolve around selling options that will eventually be out of the money.

what is the strike price

If the underlying stock is trading at $45, the $50 put option has a $5 value. This is because the underlying stock is below the strike price of the put. Likewise, in-the-money puts are those with strikes higher than the market price, giving the holder the right to sell the option above the current market price. An option's value is informed by the difference between the fixed strike price and the market price of the underlying security, known as the option's “moneyness.”

Are Some Strike Prices More Desirable Than Others?

So the strike price is the price at which the option goes in the money (i.e., has some value at expiration) or out of the money (i.e., is worthless). New options investors should consider adhering to some basic principles. They should refrain from writing covered ITM or ATM calls on stocks with moderately high implied volatility and strong upward momentum. Unfortunately, the odds of such stocks being called away may be quite high. New options traders should also stay away from buying OTM puts or calls on stocks with very low implied volatility. For a put writer, the wrong strike price would result in the underlying stock being assigned at prices well above the current market price.

Instead, it indicates the relationship of the stock to the strike price and whether an option would retain any value if the option expired today. So in-the-money options would retain at least some value, while out-of-the-money options would be worthless. The strike price is a key factor in the value of an options contract, and so it’s vital to know the relationship between the strike price and the underlying stock’s price to figure an option’s value. Some traders will use one term over the other and may use the terms interchangeably, but their meanings are the same. Assume both call options are the same; the only difference is the strike price. It means that the strike price is essential in determining an option's moneyness and is a necessary component for calculating the break-even point and profit or loss for all options positions.

The strike price is a key variable of call and put options, which defines at which price the option holder can buy or sell the underlying security, respectively. Strike prices are important when trading options, because they can directly affect the amount of profit you make when exercising a call or put option. The strike price represents the amount of profit – or loss – you could make by exercising an option at the contract’s predetermined expiration date. Options are financial contracts that give the buyer the right, but not obligation, to buy or sell the underlying stock at the strike price during the term of the option. An option giving the right to buy is a call option and an option giving the right to sell is called a put option. The prices of the March 2014 puts and calls on GE are shown in Tables 1 and 3 below.

As we know, securities that have a higher open float, and are widely traded, are included in derivatives trading. For a security to be included in options trading, there are set criteria of exchange, some of which include volatility, risk tolerance and standard deviation of daily price change. The stock exchange may also consider the total contract value as one of the eligibility criteria. Conversely, the call option seller would be obligated to sell the underlying asset at the contract’s predetermined strike price if the buyer chooses to exercise the option. The risk of assignment increases if the option is deep-in-the-money and close to expiration.

Rick's calls would expire unexercised, enabling him to retain the full amount of his premium. Knowing what the strike price is and what it means is crucial when deciding to trade options. And most importantly, remember that buying options doesn’t mean you have to buy or sell the underlying assets if doing so isn’t the right move for your portfolio. Keep in mind, too, that in order to book a profit on an options trade your gains must exceed the purchase price of the option itself.

How to choose the right strike price for an option?

That means although you plunk down a smaller amount of capital to buy an OTM call, the odds you might lose the full amount of your investment are higher than with an ITM call. As indicated in the table above, the corresponding price (LTP) to the call and put https://www.tradebot.online/ option indicates the moneyness of the strikes. In this scenario, the Nifty50's 16,200 call option strike will be termed an “at the money” (ATM) option. Similarly, the 16,300 call option strike will be referred to as an “out of the money” (OTM) option.

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