Strike Price

Understanding the term: Strike Price

The concept of Strike Price plays a pivotal role in the trading world, particularly within the realms of options trading. To keep it simple, the Strike Price is the predetermined price at which an options contract can be bought or sold when it is exercised. It's the price at which the underlying asset (like a stock, commodity, or currency) will be transacted.

Strike Price: The Price is set

When you set foot into the world of trading, the term Strike Price often comes up. The straightforward meaning of Strike Price is that it's the price at which you, as the trader, have the right to buy (in case of a call option) or sell (in case of a put option) the underlying asset when you decide to exercise the option.

How does Strike Price work in trading?

The Strike Price is set when an options contract is first written and remains unchanged until the expiration of the contract. This is why it’s sometimes referred to as the exercise price. It's crucial in determining whether an option has any intrinsic value and hence, whether it is in the money (ITM), at the money (ATM), or out of the money (OTM).

Real-World Example of Strike Price

For instance, if you have a call option with a Strike Price of $50 on a particular stock and the current market price of the stock increases to $60, you could exercise your option to buy the stock at the Strike Price and immediately sell it in the market for $60, making a profit of $10 per share.

The Impact of Strike Price

The Strike Price largely affects how much premium you need to pay for an option. Lower Strike Price for call options or higher strike price for put options, tend to have higher premiums and vice versa. Essentially, the Strike Price reflects your expectation of where the asset's price will go.

Understanding Strike Price is key in Trading

In summary, understanding the concept of Strike Price is extremely important in options trading. It forms the basis of various trading strategies and determines whether an option can generate profits. Make sure you fully understand this term along with other trading jargon to smartly navigate through the exciting world of trading.