Strike Price

What Is a Strike Price?

In an options contract, the strike price is the settled upon price at which a specific security might be bought (on account of a call option) or sold (on account of a put option) by the option holder until or upon the expiration of the contract. The term strike price is utilized interchangeably with the term exercise price.
Options are derivative contracts that grant their buyers the right, or option — yet not the commitment — to buy or sell a specific security (generally 100 shares of a stock) at a specific price (the strike price) until or upon a certain date (the expiration date).
Buying or selling the underlying security determined in an options contract is alluded to as practicing an option. American-style options can be exercised any time after they are purchased until they terminate, while European-style options must be exercised upon maturity.

How Does the Strike Price Affect the Value of an Options Contract?

The strike price is the main determinant of the value (premium) of an options contract. Different factors that influence contract value incorporate the spot value (current market price) of the underlying asset, the volatility of the underlying asset, and the time allotment until the contract's expiration.
Since the holder of a call option has the privilege to buy the contract's underlying asset, the lower the strike price, the more significant the call option ought to be. At the end of the day, the lower the strike price is compared to the spot price (the market value of the underlying asset at the time the contract is exercised), the to a greater extent a discount the call option holder can buy the asset at.
Since the holder of a put option has the privilege to sell the contract's underlying asset, the higher the strike price, the more significant the put option ought to be. As such, the higher the strike price is compared to the spot price, the to a greater degree a profit the put option holder can make when they sell the underlying asset after practicing the contract.

What Are the 3 Types of Strike Prices?

Options are classified by whether their strike prices are above, below, or equivalent to the current market value of the underlying asset. All in all, they are sorted in view of whether they have intrinsic value.
Since spot prices (market values) change over the long haul, yet strike prices (as framed in the terms of options contracts) don't, an option's intrinsic value can change throughout the span of its contract. An option might fall into one of the three categories below at one point in time however move into one of different categories on some other occasion.

1. In-the-Money (ITM) Strike Prices

Assuming the strike price of an option is with the end goal that its buyer could exercise the option for pretty much (in the event that assuming it is a put or a call) than it is worth, that option is thought of "in the money."
On account of a call option, in the event that the strike price is below the spot price (current market value), that option is in the money on the grounds that the holder could exercise the option by buying the underlying asset for not exactly its market value. A put option, then again, is in the money in the event that the strike price is above the spot price on the grounds that the holder could exercise the option by selling the underlying asset for more than its market value.

2. At-the-Money (ATM) Strike Prices

Assuming the strike price of an option is equivalent to the spot price (current market value), that option is thought of "at the money" since practicing it would permit the holder to buy or sell the underlying asset at similar price as they could on the open market. Generally, there is no great explanation to exercise an option when it is at the money. As a matter of fact, since options contracts cost money to purchase, the holder of an ATM option contract would experience a small capital loss whether they exercised the option or just let it terminate.

3. Out-of-the-Money (OTM) Strike Prices

In the event that the strike price of an option is to such an extent that it doesn't have intrinsic value (i.e., the strike price is higher than the market value on account of a call or lower than the market value on account of a put), that option is thought of "out of the money." There would be no point in practicing an OTM option, yet a few buyers could hold an OTM option in the expectations that the value of the underlying asset would change in support of themselves before the expiration of the contract.
On account of a call option, in the event that the strike price is above the spot price (current market value), that option is out of the money in light of the fact that the holder would buy shares over the market price assuming they exercised it. On account of a put option, on the off chance that the strike price is below the spot price, that option is out of the money on the grounds that the buyer would sell the underlying asset below market value assuming they exercised it.

Moneyness of Call and Put Options by Strike Price

Features

• The strike price is the price at which a derivative contract can be bought or sold.
• The value of a derivative depends on its underlying asset.
• The strike price, otherwise called the exercise price, is the key determinant of option value.

FAQ

What's the Difference Between a Strike Price and a Spot Price?

Spot price alludes to a financial asset's current market value, or the amount it is by and by being bought and sold for in the open market. Spot price changes continually relying upon how an asset is valued by the market. Strike price alludes to the price at which an option contract holder might buy (on account of a call) or sell (on account of a put) the contract's underlying asset for upon or prior to the contract's expiration. Since the strike price of an option is framed in a contract, it doesn't change over the long run.

What's the Best or Most Advantageous Strike Price?

For some random security, there is no best or most beneficial strike price for options contracts. Options whose strike prices are close to the underlying asset's market value (spot price) carry less risk but at the same time are less inclined to bring about large capital gains. Options whose strike prices are farther from the underlying asset's market value are riskier and less inclined to bring about capital gains, yet they can bring about larger profits when resold or exercised assuming the underlying security changes fundamentally in value in the right heading. For risk-unwilling investors, options whose strike prices and spot prices are comparative might more allure, while for investors who are in favor of risky wagers and are seeking larger returns, options whose spot prices are farther from their strike prices might be more attractive, particularly assuming that the underlying asset is known to be exceptionally unpredictable (prone to change in price essentially over moderately short periods of time).