Can an option have a negative strike price?

By Chad Langager AAA
A:

The simple answer is that, at least when it comes to exchange traded options, an option can't have a negative strike price .

Remember that an option gives the holder the right, but not the obligation, to buy or sell an underlying security at a set price (strike price) before a set date in time. If the strike price were to be negative, it would mean that it would cost you a negative amount to buy or sell a security. If it was a call option on a stock with a strike price of -$5, it would mean that if you exercised the option you would receive $5 for each share you bought. This would mean that no matter what happened to the price of the underlying security, the option holder would exercise the option.

The strike price of an option should be related to the price of its underlying security. In most cases, the price of these securities can never be negative, so there is no reason to have an option with a negative strike price.

However, this doesn't necessarily mean that you couldn't have an option with a negative strike price. The reason for this is that an option is simply a contract between two parties. A contract is completely customizable and could even have an option with a negative strike price.

For more insight, see the Options Basics Tutorial.

RELATED FAQS

  1. What does the efficient market hypothesis assume about fair value?

    Found out what the efficient market hypothesis says about the fair value of securities, and learn why technical and fundamental ...
  2. How do I implement a forex strategy when spotting a Triple Bottom Pattern?

    Learn about the triple bottom pattern and how it is used to create effective trade strategy in the forex market, including ...
  3. How are Upside Gap Two Crows patterns interpreted by analysts and traders?

    Learn about the upside gap two crows chart pattern and how analysts and traders interpret this pattern as an indicator of ...
  4. How do I build a profitable trading strategy when spotting an Upside Gap Two Crows ...

    Learn about the upside gap two crows pattern and how this reversal signal is used to create profitable trade strategy, including ...
RELATED TERMS
  1. Indicator

    Indicators are statistics used to measure current conditions ...
  2. Intraday Momentum Index (IMI)

    A technical indicator that combines aspects of candlestick analysis ...
  3. Forex Spread Betting

    A category of spread betting that involves taking a bet on the ...
  4. Multibank Holding Company

    A company that owns or controls two or more banks. Mutlibank ...
  5. Short Put

    A type of strategy regarding a put option, which is a contract ...
  6. Money Flow Index - MFI

    A momentum indicator that uses a stock’s price and volume to ...

You May Also Like

Related Articles
  1. Trading Strategies

    Know How To Manage Gaps On Your Trading ...

  2. Charts & Patterns

    Why These Are 2015's Most-Promising ...

  3. Chart Advisor

    Trade Healthcare Providers with this ...

  4. Fundamental Analysis

    Is Apple's Stock Over Valued Or Undervalued?

  5. Trading Strategies

    Trading On The Psychology Of Round Numbers

Trading Center