The strike price is the predetermined price at which an underlying asset can be bought or sold when exercising a put or call option.
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 in a nutshell
- The strike price is the pre-defined price at which an option can be exercised.
- It is set when the option contract is created and remains fixed throughout its lifetime.
- The strike price determines whether an option is in-the-money, at-the-money, or out-of-the-money.
- For call options, the strike price is the price at which the underlying asset can be bought.
- For put options, the strike price is the price at which the underlying asset can be sold.
How are options categorized based on their relationship to the strike price?
Options can be categorized as in the money (ITM), out of the money (OTM), or at the money (ATM), depending on their relationship to the current stock price.
Call Options
Call options give the holder the right to buy an underlying asset at the strike price, before or on the expiry date.
- If the strike price is higher than the current stock price, the call option is out of the money (OTM).
- If the stock price exceeds the strike price, the option is in the money (ITM).
- Options with strike prices close to the current market price are known as at the money (ATM) options.
Put Options
Put options give the holder the right to sell an underlying asset at the strike price, before or at the expiration date.
- If the strike price is higher than the current stock price, the put option is in the money (ITM).
- If the stock price exceeds the strike price, the option is out of the money (OTM).
- Put options with strike prices close to the current market price are referred to as at the money (ATM) options.
Example: How does the concept of strike price work?
Here’s an example that explains how the concept of strike price works: 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.
What does the strike price determine?
The strike price determines whether a trade will be profitable or not. Whether it’s call or put options, knowing how the strike price relates to the current market price is key.
Options are classified as in the money (ITM), out of the money (OTM), or at the money (ATM), depending on their relationship with the current market price.
Along with accurate strike price, you also need to predict the right expiry time to reap maximum profit from your investment.
Read other important articles in the binary glossary.
