Strike Prices
Exercise price refers to the price at which the underlying asset specified in an options contract can be bought or sold. For a call options contract, the exercise price is the price at which the underlying asset can be bought, while for a put options contract, the exercise price is the price at which the underlying asset can be sold. The exercise price is usually related to the expiration date of the options contract. Before the expiration date, investors holding options can choose whether to exercise the options to buy or sell the underlying asset. The choice of exercise price has a significant impact on the profitability and loss of the options, and investors will determine the exercise price based on market expectations and risk preferences.
Strike Price
Definition
The strike price is the price at which the underlying asset can be bought or sold as specified in an options contract. For a call option, the strike price is the price at which the underlying asset can be purchased; for a put option, it is the price at which the underlying asset can be sold. The strike price is typically related to the expiration date of the options contract, and the holder of the option can choose whether to exercise the option to buy or sell the underlying asset before the expiration date. The choice of strike price significantly impacts the profitability and loss of the option, and investors determine the strike price based on market expectations and risk preferences.
Origin
The history of options trading dates back to ancient Greece, but the development of 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 options contracts, has existed since the inception of the options market and has evolved with market developments.
Categories and Characteristics
Strike prices can be categorized as follows:
- At-the-Money (ATM): The strike price is equal to the market price of the underlying asset.
- In-the-Money (ITM): For call options, the strike price is below the market price of the underlying asset; for put options, the strike price is above the market price of the underlying asset.
- Out-of-the-Money (OTM): For call options, the strike price is above the market price of the underlying asset; for put options, the strike price is below the market price of the underlying asset.
Specific Cases
Case 1: Suppose an investor buys a call option with a strike price of $50, while the current market price of the underlying stock is $55. Since the strike price is below the market price, the option is in-the-money, and the investor can buy the stock at $50 and sell it at the market price of $55, making a profit of $5 per share.
Case 2: Suppose an investor buys a put option with a strike price of $60, while the current market price of the underlying stock is $55. Since the strike price is above the market price, the option is in-the-money, and the investor can sell the stock at $60 and buy it back at the market price of $55, making a profit of $5 per share.
Common Questions
Question 1: How does the strike price affect the value of an option?
Answer: The strike price directly affects the intrinsic value and time value of the option. In-the-money options have intrinsic value, while out-of-the-money options have no intrinsic value and only time value.
Question 2: How do investors choose the appropriate strike price?
Answer: Investors should choose the strike price based on market expectations, risk preferences, and investment strategies. Generally, risk-averse investors may prefer at-the-money or in-the-money options, while risk-tolerant investors may opt for out-of-the-money options.
