The strike price is a term given to the market price of a commodity at which it is bought or sold. In simple terms, the strike price is the value of an asset whereon the put or call option can be executed.
As a trader, you have to predict whether the value of a commodity will exceed or recede the strike price after the expiration time. Failing to pick an accurate strike price can make you lose all your invested amount.
Strike price of Call Options and Put Options
Call options in strike price mean the value at which you can buy stocks. Whereas, put options in strike price means the value at which you can sell the stocks.
The strike price of a commodity that is below than stock price is safer for the call option as compared to the strike price that is above the stock price. Similarly, a better put option is the one where the strike price is at or above the stock price.
Strike Price in Action: Options Trading Example
Here’s an example that explains strike price clearly.
Let’s assume the current trading price of gold is $50. Its strike price is $55 and it expires within four hours. If the stock price is above $55 at expiry time and you have opted for a call option, this means you have made a profit.
For selecting the right strike price, you need to understand whether the asset value will be more or less than this price at the expiry time.
Along with accurate strike price, you also need to predict the right expiry time to reap maximum profit from your investment.