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. How do I set a strike price for an option?

    Learn about the strike price of an option and how to set a strike price for call and put options depending on risk tolerance ... Read Answer >>
  2. How does the term 'in the money' describe the moneyness of an option?

    Find out what in the money means about the moneyness of call or put options and what it indicates about the relationship ... Read Answer >>
  3. How do speculators profit from options?

    As a quick summary, options are financial derivatives that give their holders the right to buy or sell a specific asset by ... Read Answer >>
  4. How do I set a strike price in a put?

    Learn about put options, considerations to make before you select strike prices and how to select strike prices for your ... Read Answer >>
  5. Where did the terms in-the-money and out-of-the-money come from?

    Learn what the terms "in the money" and "out of the money" mean, where the terms come from, and how investors use the terms ... Read Answer >>
  6. Why are options very active when they are at the money?

    Stock options, whether they are put or call options, can become very active when they are at the money. In the money options ... Read Answer >>
Related Articles
  1. Trading

    What's the Strike Price?

    The strike price is the price at which a derivative can be exercised, and refers to the price of the derivative’s underlying asset. In a call option, the strike price is the price at which the ...
  2. Trading

    Getting Acquainted With Options Trading

    Learn more about stock options, including some basic terminology and the source of profits.
  3. Trading

    A Newbie's Guide To Reading An Options Chain

    Learning to understand the language of options chains will help you become a more informed trader.
  4. Trading

    Getting Started In Forex Options

    Stocks are not the only securities underlying options. Learn how to use FOREX options for profit and hedging.
  5. Trading

    Options Hazards That Can Bruise Your Portfolio

    Learn the top three risks and how they can affect you on either side of an options trade.
  6. Trading

    Understanding Bull Spread Option Strategies

    Bull spread option strategies, such as a bull call spread strategy, are hedging strategies for traders to take a bullish view while reducing risk.
RELATED TERMS
  1. Strike Price

    The price at which a specific derivative contract can be exercised. ...
  2. Near The Money

    An options contract where the strike price is close to the current ...
  3. Option

    A financial derivative that represents a contract sold by one ...
  4. Bear Call Spread

    A type of options strategy used when a decline in the price of ...
  5. At The Money

    A situation where an option's strike price is identical to the ...
  6. Options Contract

    A contract that allows the holder to buy or sell an underlying ...
Hot Definitions
  1. Trumpcare

    The American Health Care Act, also known as Trumpcare and Ryancare, is the Republican proposal to replace Obamacare.
  2. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
  3. Portable Alpha

    A strategy in which portfolio managers separate alpha from beta by investing in securities that differ from the market index ...
  4. Run Rate

    1. How the financial performance of a company would look if you were to extrapolate current results out over a certain period ...
  5. Hard Fork

    A hard fork (or sometimes hardfork) is a radical change to the protocol that makes previously invalid blocks/transactions ...
  6. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
Trading Center