Strike price = Price at which holder of the options contract can buy (for call option) or sell (for put option) the underlying asset. It is also known as the exercise price.
It is the fixed price that you will pay or receive for 100 shares of the stock that is specified in the option contract.
It is the transaction price per share of the stock when the option contract is exercised, regardless of the current market value of the stock.
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If you have purchase a call (100 shares) of company “ABC” stock options at a strike price of “5”, this means that you can exercise your rights to purchase the shares at a cost of $500 (100 shares x $5), excluding commission.
For buyer of put options, that is the price where by the shares can be sold.
Options exercise price are generally spaced 5 points apart for stocks, although for more expensive stock, it may be spaced 10 points apart.
A $100 stock might, for example, have options with exercise price of $90, $95, $100, $105 and $110. A $200 stock might have the options price at $190, $200 and $210.
Some stocks may be price at 2 ½ points apart. Generally these stocks are worth $50 or less. A $$20 stock might have options with exercise price of $17.5, $20 and $22.50.
Below is an example of Caterpillar Inc. (CAT). Do you notice the exercise price internal is 2.5 points for value near the current stock price ($55 to $75) and 5 points apart for value that are further away?
From the above example, you will notice that options strike prices are not a rigid set of numbers. The Exchange officials may alter the interval to improve the depth and liquidity of the options. They may space the strike to be 5 points apart even if it is selling for more than $100. For example, a $176 stock is very active but not volatile, then there might be a $175 strike created in between the exercise price of $170 and $180.
You may ask why are there so many exercise prices exist?
The main reason is that most options trading strategies, basic or advance, is only make possible due to the different combination of exercise price.
Take the popular Bull Call Spread strategy as an example, you can profit from a moderate bullish market by buying lower strike call and selling a higher strike call with the same expiration date.
This strategy will not be possible without the different level of exercise price.
Choose the strike price of your options contract carefully and apply the appropriate option strategies to maximize your probability of profit in your trading career.
Are you confused by the symbols that each option represent? Find out what these symbols represent at Stock Option Quotes Naming Convention
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