In the context of options, the strike price is the price at which the option holder can buy or sell the underlying security. The strike price is specified when the option is purchased and remains the same for the life of the option.
For example, if you buy a call option with a strike price of $100, you have the right to buy the underlying security at $100 per share, regardless of the current market price. If the market price of the underlying security rises above $100, you can exercise your option and buy the security at $100, pocketing the difference.
Conversely, if you buy a put option with a strike price of $100, you have the right to sell the underlying security at $100 per share, regardless of the current market price. If the market price of the underlying security falls below $100, you can exercise your option and sell the security at $100, pocketing the difference.
The strike price is an important factor in determining the value of an option. The closer the strike price is to the current market price, the more valuable the option will be. This is because the option holder has a better chance of making a profit if they exercise their option.
Strike prices are typically set at increments of $0.50 or $1.00. For example, an option with a strike price of $100 could also have strike prices of $99.50, $100.00, and $100.50.
Strike prices can also be set at non-standard increments, such as $99.75 or $100.25. This is often done to provide more granularity and to better align the strike price with the investor’s expectations.
The strike price is an important part of an option contract and it is important to understand how it works before you trade options.