« Back to Glossary IndexWhat is a Strike Price?
The strike price, also known as the exercise price, is the predetermined fixed price at which the holder of an option can buy (call option) or sell (put option) the underlying asset when exercising the contract. It is a core component of any options contract, directly influencing its value, risk-reward profile, and strategic application.
Understanding the Strike Price
The strike price is set when the option is created and remains unchanged throughout the contract’s life. It defines whether the option is profitable to exercise relative to the current market price of the underlying asset. For calls, it’s the buy price; for puts, the sell price. The strike price is central to determining an option’s moneyness, which classifies whether it is in-the-money (ITM), at-the-money (ATM), or out-of-the-money (OTM).
Frequently Asked Questions
- What does a strike price of $120 mean? It means you can buy (via a call) or sell (via a put) the underlying asset at $120 when exercising the option.
- Do you buy at the strike price? Yes. Call option holders buy at the strike price, and put holders sell at the strike price when exercising.
- What happens if my option hits the strike price? The option becomes at-the-money (ATM), and further movement in the underlying price can push it in-the-money (ITM), where it gains intrinsic value.
Why the Strike Price Matters
- Establishes exercise price for options contracts
- Determines profitability and intrinsic value
- Allows strategic tailoring of options trades and hedges
- Defines moneyness status (ITM, ATM, OTM)
- Standardizes option contracts across the market
Example
If Microsoft stock is trading at $380:
- A $370 call option is in-the-money with $10 intrinsic value
- A $380 call is at-the-money with no intrinsic value
- A $400 call is out-of-the-money with only time value
Each strike reflects a different risk/reward tradeoff.
Strategic Selection
Traders and institutions choose strike prices based on market outlook:
- Deep ITM: Higher cost, higher probability, lower leverage
- ATM: Balanced risk/reward, higher volume/liquidity
- OTM: Lower cost, higher leverage, lower probability
For example, in a covered call strategy, selecting a higher strike means lower premium income but lower chance of being exercised. In a protective put, a lower strike reduces cost but provides only partial protection.
Key Components of Strike Price
- In-the-Money (ITM): Call option strike below current price; put option strike above current price
- At-the-Money (ATM): Strike price is equal to current price
- Out-of-the-Money (OTM): Call strike above current price; put strike below current price
- Intrinsic Value: The in-the-money portion of an option’s value (market price minus strike for calls, strike minus market for puts)
- Strike Price Intervals: Options are listed in standardized increments ($1, $2.50, $5, $10 depending on asset price)
- Moneyness: Classification of the option’s value in relation to the current market price
Why Strike Price Selection Matters
Strike price impacts cost, leverage, risk, and probability of success:
- ITM: More expensive, higher delta, less leverage, greater certainty
- ATM: Balanced exposure with max time value
- OTM: Cheaper, speculative, higher leverage but less likely to be profitable
In hedging, strike selection defines the level of protection. In income strategies, it governs the trade-off between premium earned and assignment likelihood. In multi-leg strategies (e.g., vertical spreads), strike selection shapes the entire risk-reward payoff structure.
Related Terms
- Exercise Price (synonym)
- Call Option
- Put Option
- In-the-Money (ITM)
- At-the-Money (ATM)
- Out-of-the-Money (OTM)
- Intrinsic Value
- Time Value
- Option Premium
- Moneyness
- Delta
- The Greeks
- Options Trading
- Option Chain
- Covered Call
- Protective Put
- Vertical Spread
Sources
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