Strike Price: Everything You Need to KnowStrike price is the price at which a specific derivative contract can be executed and it is the most important indicator of value for contracts.4 min read Show
1. What Is Strike Price? What Is Strike Price?Strike price is the price at which a specific derivative contract can be executed. It is the most important indicator of value for contracts. The strike price, also known as the exercise price, is usually decided when a contract for an option is first written and agreed. Some financial products receive value from other financial products. These products are called "derivatives," and there are two major types:
The price at which calls and puts are bought or sold is called the strike price, which is used to tell call and put contracts apart. Why Is Strike Price Important The strike price is important because it is the most useful indicator of option value. It tells the investor what price an asset must reach before it is valuable, or "in the money." By calculating the difference between the current market price of an option and its strike price, an investor can determine whether the option is in the money and how much profit per share would be gained upon its sale. In-the-money options are activated by default when the contract finishes. If you don't want this to happen, you have to buy-to-close or sell-to-close the option. Keep in mind that an in-the-money option could activate before the end of a contract if the owner is short. There's no precise way of knowing when this will happen, but as a rule of thumb, the lower the additional value, the higher the risk of this happening. If the difference between the market price and strike price is unfavorable, the option is worthless and referred to as "out of the money." If the market price and the strike price are roughly the same, that option is referred to as "at the money." PremiumThe premium is the price a buyer pays the seller for an option. It is an upfront, non-refundable purchase, even if an option has not been executed. Premiums are quoted on a per-share basis and are priced according to the strike price in relation to underlying stock price (intrinsic value), the length of time until the option expires (time value), and how much the price fluctuates (volatility value). The formula is as folows: Intrinsic value + Time value + Volatility value = Price of Option Other factors that set option prices (premiums) include:
Reasons to Consider Using Strike PriceUsing the strike price is the best way to tell the status, or moneyness, of an option. This refers to whether the option is in the money (ITM), at the money, or out of the money (OTM) and by how much. Call options
Put options
Relationship Between Strike Price and Call Option PriceThe higher the strike price, the cheaper a call option will be, allowing investors to purchase stock at a lower price. The following table lists option premiums typical for near-term call options at various strike prices when the underlying stock is trading at $50:
Relationship Between Strike Price and Put Option PriceThe higher the strike price, the more valuable a put option will be, allowing the investor to get as much money as possible when selling their stock. The following table lists option premiums typical for near-term put options at various strike prices when the underlying stock is trading at $50:
Strike Price IntervalsIntervals for strike prices vary depending on the current market price and the asset type of the underlying option.
The strike price interval can also vary depending on whether or not an option is an index option at 5 or 10 points or futures option at 1 or 2 points. Example of Strike PriceAs an example, consider two option contracts. One contract is a call option with an $80 strike price. The other contract is a call option with a $100 strike price. The current price of the underlying stock is $90. Both call options are the same; the only difference is the strike price. The first contract is in-the-money and worth $10, because the stock is trading $10 higher than the strike price. The second contract is out-of-the-money by $10. Need More Help With Strike Price?If you need help with strike price, you can post your question or concern on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb. Was this document helpful? Share it with your network! The Best Lawyers For Less Hire the top business lawyers and save up to 60% on legal fees Talk to a Top Lawyer for Free Content Approved Want High Quality, Transparent, and Affordable Legal Services? What happens if price is above strike price?Call options are “in the money” when the stock price is above the strike price at expiration. The call owner can exercise the option, putting up cash to buy the stock at the strike price. Or the owner can simply sell the option at its fair market value to another buyer before it expires.
When the stock price is greater than the strike price a put is?A put option that is in the money is one whose strike price is greater than the market price of the underlying asset. This means that the put holder has the right to sell the underlying at a price that is greater than where it currently trades.
What happens to the value of a call and put option if the strike price increases?Answer and Explanation: The higher the strike price of a put option, the higher the price you can sell the underlying asset at. Thus, the put option becomes more attractive to holders of the option and the value goes up.
What is the difference between strike price and premium?The strike price determines whether an option has intrinsic value. An option's premium (intrinsic value plus time value) generally increases as the option becomes further in-the-money. It decreases as the option becomes more deeply out-of-the-money.
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If the market price is above the strike price on a put contract, the difference is termed the
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