What Is Strike Price?
The strike price is the fixed price at which an option contract can be exercised. It determines whether a call or put option has intrinsic value.
Definition
The strike price (also called the exercise price) is the predetermined price at which an option holder can buy (call) or sell (put) the underlying stock. It's fixed when the option contract is created and doesn't change.
For calls, you want the stock to trade above the strike to have intrinsic value. For puts, you want the stock to trade below the strike. The relationship between the current stock price and the strike price determines whether the option is in-the-money, at-the-money, or out-of-the-money.
Strike prices are set at regular intervals (e.g., $5 or $10 apart) by the exchange. When a stock trades at $145, you might see strikes at $135, $140, $145, $150, $155, etc. Options closer to the current price (at-the-money) tend to have the highest time value.
Real-World Example
Stock XYZ trades at $100. A call option with a $110 strike is out-of-the-money — you'd be paying $110 for stock worth $100. A call with a $90 strike is in-the-money — you can buy at $90 what's worth $100, so it has $10 of intrinsic value.
Why It Matters
Choosing the right strike price is one of the most important decisions in options trading — it determines your breakeven point, your risk/reward ratio, and your probability of profit.
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Frequently Asked Questions
How do I choose the right strike price?
It depends on your strategy and risk tolerance. Lower strikes on calls (closer to at-the-money) cost more but have a higher probability of profit. Higher strikes cost less but require bigger stock moves to profit. Most beginners start near-the-money.
Does the strike price change?
No — the strike price is fixed when the contract is created. However, it's adjusted for stock splits. If a $100 stock splits 2-for-1, a $100 strike becomes a $50 strike on double the contracts.
What is the difference between strike price and stock price?
The stock price is the current market price of the stock, which changes every second. The strike price is the fixed price in your option contract that never changes. The difference between them determines intrinsic value.
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