![]() The exchanges make several strike price options available to cover a range set at fixed intervals (e.g. ![]() Strike prices are based on the underlying security’s spot price, which is the price it closed at the previous day (as well as factors like trading volume and volatility). The investor can profit from the put option by selling the security for more than its market price – or by selling the option for more than they paid for it – before the contract expires. If the security’s strike price is $50 – but the security is trading for just $25 on the open market – the investor can sell the security for $50 by exercising the option. Strike Price for Put OptionsĪ put option gives the investor the option of selling the security at the strike price until the contract expires, regardless of how much the security is trading for on the open market. For example, if the strike price for the security is $50 – but the stock is trading for $100 – the investor can buy it for $50 by exercising the option.īefore the contract expires, the investor can profit by purchasing the security at the strike price and selling it at a profit, or by selling the call option itself at a profit. Strike Price for Call OptionsĪ call option gives the investor the option to buy the security at the strike price before the contract expires. Option strike prices make the option profitable depending on whether the actual, current price of the security is greater than the strike (for a call option) or less than the strike (for a put option). An option has intrinsic value if it can be exercised at a profit, that is, if the underlying security can be bought or sold at the strike price to earn a profit. More specifically, the relationship between strike price and the underlying security’s market value is what determines how much intrinsic value an option has. The strike price matters because it’s a major determining factor in the value of the option. Strike prices are set by options exchanges such as the American Stock Exchange, the New York Stock Exchange, and the Chicago Board of Options Exchange. In the US, option contracts come with expiration dates that serve as the deadline for the investor to exercise their option (to buy or sell at the strike price). It also states how many shares an option holder can buy or sell, though 100 is the typical number. ![]() The option contract sets the strike price for the underlying security. In the case of an option contract, the asset is often a security (such as a stock) but options can be written for anything. What Is an Option Contract?Īn option is a type of derivative (or a financial contract) that derives its value from an underlying asset. To understand what strike price means in options trading, it’s helpful to start with an introduction to the option contract. The strike price of an option is a fixed dollar amount that stays the same during the entire option contract term. What Is the Strike Price in Options Trading?
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