Updated Mar 21, 2022

What is a strike price?

What is a strike price?

An option's striking price (or exercise price) is the fixed price at which the option's owner can buy (in the case of a call) or sell (in the case of a put) the underlying security or commodity. The strike price of an option can be determined using the spot price, which is the market price of the underlying security or commodity on the day the option is purchased. The strike price could also be set at a discount or premium.

In a two-party derivatives contract, the strike price is a critical variable. The deal will be at the striking price if the contract demands delivery of the underlying instrument, regardless of the market price of the underlying asset at the moment. The exercise price is another name for the striking price.

Significance of Strike Price

In the context of derivatives trading, strike prices are used. Financial products whose value is derived from the underlying asset are known as derivatives. Both call and put options rely heavily on the strike price. The buyer of a call option will have the right (but not the responsibility) to purchase the shares at the strike price at any time in the future. A put option buyer, on the other hand, will have the right (but not the responsibility) to sell the stock at the strike price at any time in the future.

The strike price has a significant impact on the option's value. A contract's strike price is determined when the contract is written. It denotes the price at which the underlying asset must trade to be in-the-money or ITM. The value of an option is determined by the price difference between the strike price and the price of the underlying stock.

Call Options – Strike Price

The buyer and seller of a call option agreement that the buyer will get the right to buy a certain number of shares of stock at a certain price, and the seller will receive the option's purchase price in exchange for agreeing to sell the shares to the option holder at the strike price if the option holder elects to exercise their option. Options are only valid for a certain amount of time before they expire.

The option buyer can exercise the option at any moment before it expires on the designated date. If the call option expires "out-of-the-money," that is, with the underlying stock price still below the strike price, the option seller will profit by the amount received for the option sale.

If the option is "in-the-money" before to expiration – that is, the underlying stock price has increased to a level above the option strike price – the buyer will profit from the difference between the option strike price and the actual stock price, multiplied by the number of shares in the option.

Put Options – Strike Price

The buyer and seller of an option agreement that the option buyer has the right to sell short shares of the stock at the option strike price. The option seller is paid the option's purchase price, sometimes known as the "premium."

A put option buyer has the right, but not the responsibility, to exercise the option and sell short the stated number of shares of stock to the option seller at the predetermined exercise price at any time before the option expires. If the stock price falls below the option strike price before expiration, the buyer of the option will profit.

If the option expires out of the money, which in the case of a put option implies the stock price remains higher than the strike price until the option's expiration date, the seller will profit from selling the option.

Basis Point

1. When trading options, the buyer of the option contract must pay the premium, which is the cost of purchasing the option. The buyer is said to be exercising the option if they employ the right.

2. In the case of a call option, it is advantageous to exercise the option if the strike price is below the underlying securities market price; in the case of a put option, it is advantageous to exercise the option if the strike price is above the market price.

3. When trading options, the trader can choose from a variety of strike price ranges that are specified by the exchange. Because of strong market changes, the full range of strike prices may expand beyond the initial set boundaries over time.

Conclusion

The exercise price, often known as the striking price, is the most important element in a derivative contract between two parties. It is the price at which the option trader has control of the underlying stock if he chooses to exercise the option. The strike price of a call option is the amount that the buyer of the option must pay to the writer of the option, whereas the strike price of an input option is the amount that the writer of the option must pay to the holder of the option. When one buys an option contract, the exercise price does not fluctuate and remains the same regardless of the price of the underlying security, i.e., regardless of the price of the underlying security, the exercise price remains fixed.