Glossary term
Strike Price
A strike price is the fixed price at which an option holder can buy or sell the underlying asset if the option is exercised.
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What Is a Strike Price?
A strike price, also called an exercise price, is the fixed price at which an option holder can buy or sell the underlying asset if the option is exercised. It is one of the core terms that defines what an options contract is worth and how it behaves as the market price changes.
For a call option, the strike price is the price at which the buyer can buy the underlying asset. For a put option, it is the price at which the buyer can sell the underlying asset. The strike does not change after the contract is created, although corporate actions can sometimes lead to contract adjustments.
Key Takeaways
- The strike price is the fixed exercise price in an options contract.
- A call option benefits when the underlying price rises above the strike, before considering premium and costs.
- A put option benefits when the underlying price falls below the strike, before considering premium and costs.
- The strike helps determine whether an option is in the money, at the money, or out of the money.
- Choosing a strike changes the cost, risk, probability of profit, and sensitivity of an options position.
How the Strike Price Shapes an Option
The strike price sets the contract's economic threshold. If a stock trades at $80 and a call option has a $75 strike, the call gives the holder the right to buy shares for less than the current market price. If the same call has a $90 strike, it would not be useful to exercise immediately because the shares can be bought in the market for less.
That relationship between the strike and the market price affects intrinsic value. A call has intrinsic value when the market price is above the strike. A put has intrinsic value when the market price is below the strike. Any remaining option value reflects time value, volatility expectations, interest rates, dividends, and supply and demand.
Strike Price and Option Status
Status | Call Option | Put Option |
|---|---|---|
In the money | Market price is above the strike | Market price is below the strike |
At the money | Market price is near the strike | Market price is near the strike |
Out of the money | Market price is below the strike | Market price is above the strike |
What Traders Evaluate
Lower-strike calls and higher-strike puts generally cost more because they are closer to, or already have, intrinsic value. Farther out-of-the-money options usually cost less, but they require a larger favorable move to become valuable before expiration.
The strike also changes risk exposure. A conservative hedge may use a strike near the current price to provide more direct protection, while a speculative trade may use a farther strike to reduce upfront cost but accept a lower probability of finishing in the money.
Where Confusion Happens
The strike price is not the same as the breakeven price. A call buyer's breakeven usually includes the strike plus the premium paid. A put buyer's breakeven usually includes the strike minus the premium paid. Commissions, fees, assignment rules, taxes, and early exercise features can also affect the actual outcome.
The strike also does not guarantee execution at a profit. An option can move in the expected direction and still lose money if time decay, volatility changes, or the premium paid outweigh the intrinsic value gained.
The Bottom Line
The strike price is the fixed exercise price that gives an option its economic shape. It determines the contract's payoff threshold, but the real trade outcome depends on premium, time, volatility, and how far the underlying price moves before expiration.