What is a Strike Price?
Strike Price is the option price set on a derivative contract. It is often used in index and stock options, where the strike is listed precisely in the contract. Strike price is where security can be purchased during call options. Conversely, it is also the amount at which security can be sold during put options.
The value of a financial product may depend on the value of other financial commodities. This is simply referred to as a derivative. Derivative products can be classified into 2 types- a put and a call.
The “Put” gives the financial product holder a way to sell stock at a specific price to interested individuals. The “Call” gives the holder a way to purchase stock at a specific price. Keep in mind that Puts and Calls are entirely optional and the holder is not forced in any way to buy or sell financial product stocks in the future.
They are often referred to as Exercise Prices. It is the single most important element in option pricing. Other factors to think about include prevailing interest rates, underlying security and option volatility.
Understandably, strike prices are agreed upon even before a contract drawing. They are commonly traded in increments of $2.5 and $5. The investor has to agree with the strike price before the option is passed.
The option’s strike price and current market price are different. The difference between them is representative of the amount of profit per share gained when the option is bought or sold.
Valuable options are sometimes referred to as in-the-money, while worthless options are sometimes referred to as out-of-the-money at expiration.
An Example of Strike Price
Let’s say there are 2 option contracts available. One is a call option that has a $100 strike. The other is a call option that has a $150 price strike. The underlying stock price is standing at $145. Now, let’s say all that strike is the only difference between these two option contracts.
The first contract has a gain of $45, which can also be called an in-the-money valued at $45. This means the stock is currently standing at $45 higher than the first contract’s strike price.
The second contract has a $5 loss, which can also be called an out-of-the-money valued at $5. When the asset doesn’t reach the strike price, then that option is considered worthless.
Final Thought
When looking to trade derivatives like options it’s important to understand as much as you can about the product such as strike price, expiration and time decay. These are all important factors will help you become a better trader by being in the know!