Strike Price
Key Takeaways
- The strike price is the fixed price at which an option holder can buy or sell the underlying asset
- It determines whether an option is in the money, at the money, or out of the money
- Lower strike prices make calls more expensive and puts less expensive
- Strike price selection is a key decision in options trading strategy
Definition
The strike price, also called the exercise price, is the predetermined price at which the holder of an option can buy (for a call) or sell (for a put) the underlying asset when the option is exercised. It is a fixed term of the options contract that does not change over the life of the option.
The strike price is the reference point that determines an option's moneyness — whether it is in the money (ITM), at the money (ATM), or out of the money (OTM). This classification affects the option's premium, behavior, and probability of being profitable at expiration.
Options are available at multiple strike prices for any given expiration date. Choosing the right strike price involves balancing cost (premium), probability of profit, and potential return — and is one of the most important decisions an options trader makes.
How It Works
For call options: In the money = stock price > strike price, At the money = stock price ≈ strike price, Out of the money = stock price < strike price. For put options, it is reversed: In the money = stock price < strike price.
The relationship between strike price and stock price directly affects the premium. A call with a lower strike price (deeper in the money) costs more because it has more intrinsic value. An out-of-the-money call with a higher strike price costs less but has a lower probability of becoming profitable.
Options typically have strike prices at standardized intervals — $1 apart for stocks under $50, $2.50 apart for stocks $50-$200, and $5 or $10 apart for higher-priced stocks. Heavily traded stocks may have strikes at every $1 interval. Weekly and monthly options provide different expiration dates at each strike.
Example
Apple (AAPL) trades at $190. Available call options include: $180 strike (in the money, $14 premium), $190 strike (at the money, $7 premium), $200 strike (out of the money, $3 premium). The $180 call has $10 of intrinsic value plus $4 of time value. The $200 call has no intrinsic value — its entire $3 premium is time value, making it cheaper but less likely to profit. If Apple rises to $210, all three calls are profitable, but the $200 call returns ($210-$200-$3)/$3 = 233%, while the $180 call returns ($210-$180-$14)/$14 = 114%. The OTM option provided higher leverage.
Why It Matters
Strike price selection is central to options trading success. It determines your risk-reward profile, breakeven point, and probability of profit. Selecting a strike that is too far out of the money may be cheap but is unlikely to profit. Selecting one that is too deep in the money ties up more capital with less leverage.
Understanding how strike prices relate to stock prices helps investors construct appropriate strategies. Income-oriented strategies like covered calls often use slightly out-of-the-money strikes, while protective put strategies select strike prices based on the maximum loss the investor is willing to accept.
Advantages
- Multiple strike prices provide flexibility in strategy construction
- OTM strikes offer leverage; ITM strikes offer higher probability
- Standardized strikes create liquid, tradeable markets
- Strike price selection allows precise risk-reward calibration
Limitations
- Wide strike intervals for some stocks limit precision
- Deep OTM strikes are cheap but rarely profitable
- Strike selection requires understanding of probability and risk
- Available strikes may not match the exact target price desired
Frequently Asked Questions
Related Terms
Browse more definitions in the financial terms glossary.