Strike Price
Options contracts are derivatives that give the holders the right, but not the obligation, to buy or sell some underlying security at some point in the future at a pre-specified price. This price is known as the option's strike price (or exercise price). For call options, the strike price is where the security can be bought by the option holder; for put options, the strike price is the price at which the security can be sold.An option's value is informed by the difference between the fixed strike price and the market price of the underlying security, known as the option's "moneyness."For call options, strikes lower than the market price are said to be in-the-money (ITM), since you can exercise the option to buy the stock for less than the market and immediately sell it at the higher market price. Likewise, in-the-money puts are those with strikes higher than the market price, giving the holder the right to sell the option above the current market price. This feature grants ITM options intrinsic value.Calls with strikes that are higher than the market, or puts with strikes lower than the market, are instead out-of-the-money (OTM), and only have extrinsic value (also known as time value).
Strike Price
Definition
An options contract is a derivative that grants the holder the right, but not the obligation, to buy or sell an underlying security at a predetermined price at a future date. This price is known as the option's strike price (also called the exercise price). For a call option, the strike price is the price at which the option holder can purchase the security; for a put option, it is the price at which the security can be sold.
Origin
The concept of options can be traced back to ancient Greece, but the modern options market began with the establishment of the Chicago Board Options Exchange (CBOE) in 1973. The strike price, as a core element of an options contract, has existed since the inception of the options market and has evolved with market developments.
Categories and Characteristics
Strike prices are mainly categorized as follows:
- In-the-Money (ITM) Options: For call options, the strike price is below the market price of the underlying security; for put options, the strike price is above the market price. These options have intrinsic value.
- Out-of-the-Money (OTM) Options: For call options, the strike price is above the market price; for put options, the strike price is below the market price. These options have no intrinsic value, only time value.
- At-the-Money (ATM) Options: The strike price is equal to or very close to the market price of the underlying security. These options have zero intrinsic value but may have time value.
Specific Cases
Case 1: Suppose an investor holds a call option with a strike price of $50, and the current market price of the underlying stock is $60. Since the strike price is below the market price, the option is in-the-money. The investor can buy the stock at $50 and sell it at the market price of $60, making a profit of $10 per share.
Case 2: Suppose an investor holds a put option with a strike price of $70, and the current market price of the underlying stock is $60. Since the strike price is above the market price, the option is in-the-money. The investor can sell the stock at $70 while the market price is only $60, making a profit of $10 per share.
Common Questions
Question 1: Why is the strike price so important to the value of an option?
Answer: The strike price determines the intrinsic value of the option and whether it is in-the-money. It directly affects the potential profit for the investor when exercising the option.
Question 2: How does the relationship between the strike price and market price affect the choice of options?
Answer: Investors typically choose in-the-money options to gain intrinsic value or out-of-the-money options to speculate on time value.
