Understanding Option Strike Prices: A Key to Options Trading

The strike price of an option is the price at which shares of the underlying security are bought and sold for if the option is exercised. This price is important because it forms the basis for determining the option’s value. When the underlying security is trading above this price, the call holder is said to be in-the-money. In this case, if you are the call holder your option has intrinsic value because if the option is exercised, you can buy the security for less than its current market price. Likewise, if you own a put on a security that is trading below its strike price, the option allows you to sell the security for more than its market price. In either case, you are in-the-money.

The strike price is fixed for the life of an option; it cannot change from the time the option is written until expiration. The distance between strike prices can be important as well. This is usually based on the absolute value of the underlying, cheaper stocks. This distribution is important because it limits the choices you have when trading options because it affects the absolute expense of a given trade.