Strike Price
Strike Price: The strike price, also known as the exercise price, is the predetermined price at which an option contract can be exercised. It is the price at which the underlying Asset can be bought (for call Options) or sold (for put Options) upon exercising the option. The strike price is crucial in determining the Intrinsic Value of the option and plays a significant role in an investor’s decision-making process.
Examples:
- For a call option with a strike price of $50, if the underlying Stock rises to $60, the option holder can purchase the Stock at $50, gaining a profit of $10 per Share (excluding premiums paid).
- For a put option with a strike price of $30, if the underlying Stock falls to $20, the option holder can sell the Stock at $30, resulting in a profit of $10 per Share (again, excluding premiums).
Cases:
- In-the-Money (ITM): A call option is ITM if the current market price of the underlying Asset is above the strike price. A put option is ITM if the market price is below the strike price.
- Out-of-the-Money (OTM): A call option is OTM if the market price is below the strike price. A put option is OTM if the market price is above the strike price.
- At-the-Money (ATM): An option is ATM when the market price of the underlying Asset is equal to the strike price.