What Is Strike Price in Options Trading? A Beginner’s Guide
Introduction
If you’re new to options trading, the term strike price might seem confusing. But understanding it is essential for choosing the right contracts and building profitable strategies. In this guide, we’ll break down exactly what the strike price is, how it works, and how it influences your trading outcomes.
What Is a Strike Price?
The strike price (also known as the exercise price) is the fixed price at which the buyer of an option contract can buy (call option) or sell (put option) the underlying asset.
For example, if you buy a call option for Apple stock with a strike price of $180, it gives you the right to buy the stock at $180, no matter what the current market price is.
Why Is the Strike Price Important?
The strike price determines the profitability of an option. It’s one of the key factors in identifying whether an option is:
- In-the-money (ITM)
- At-the-money (ATM)
- Out-of-the-money (OTM)
These categories affect both the value of the option and the premium you’ll pay or receive.
Strike Price in Call vs. Put Options
| Option Type | You Gain If Market Price Is… |
|---|---|
| Call Option | Above the strike price |
| Put Option | Below the strike price |
In calls, a lower strike price is more valuable. In puts, a higher strike price is more valuable.
Real-Life Example
Imagine a trader buys a call option on Tesla with a strike price of $200. If Tesla’s current market price is $220, the option is $20 in-the-money, giving the trader potential for profit.
How Strike Prices Are Set
- Exchanges list multiple strike prices above and below the current market price.
- They are spaced in fixed intervals (e.g., $5 or $10 for U.S. stocks).
- More active stocks have tighter strike intervals.
Key Takeaways
- The strike price is the core of any options contract.
- It directly affects the intrinsic value and profitability of the trade.
- Always choose strike prices based on your market outlook, volatility, and risk tolerance.
FAQs
Q1. What does strike price mean in simple terms?
It’s the price at which you agree to buy or sell the underlying asset in an options contract.
Q2. How do I know which strike price to choose?
It depends on your strategy. Aggressive traders may go out-of-the-money; conservative traders may stay in-the-money.
Q3. Is strike price the same as the current market price?
No, it’s a fixed price defined in the contract. The market price fluctuates.
Q4. Who sets the strike price?
Strike prices are predefined by the exchange when listing the option.
Q5. Can I change the strike price after buying the option?
No. Once an option is purchased, the strike price is fixed.
