Next video:
Loading the player...

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 option holder can purchase the underlying security.  For a put option, the strike price is the price at which the option holder can sell the underlying security.  

For instance, Heather pays $100 to buy a call option priced at $1 on ABC Inc.’s shares, with a strike price of $50.  The option expires in six months. That means that any time in the next six months Heather can exercise her option to buy 100 shares at $50 regardless of the current market price of ABC shares. 

Strike price is one of the factors used to determine the profit in an unexpired option.  The strike price is compared to the current market price to determine if an option is in or out of the money.  The strike price, time to expiration and asset volatility and interest rates are the key determinates of an option’s market price.

For instance, Heather’s ABC call option is in the money any time ABC’s market price is above $51.  That’s because Heather’s cost of the ABC stock will be $50 per share, plus the $1 per share cost of the option.  If the ABC stock is below $51, the option is said to be out of the money.

Related Articles
  1. Trading

    What Is Option Moneyness?

    Get the basics under your cap before you get into the game.
  2. Trading

    How To Manage A Bull Call Spread

    A bull call spread, also called a vertical spread, involves buying a call option at a specific strike price and simultaneously selling another call option at a higher strike price.
  3. 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.
  4. 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.
  5. Trading

    Three Ways to Profit Using Put Options

    A brief overview of how to profit from using put options in your portfolio.
  6. Investing

    Why Options Trading Is Not for the Faint of Heart

    Trading options is not easy and should only be done under the guidance of a professional.
Hot Definitions
  1. Liquid Asset

    An asset that can be converted into cash quickly and with minimal impact to the price received. Liquid assets are generally ...
  2. Nostro Account

    A bank account held in a foreign country by a domestic bank, denominated in the currency of that country. Nostro accounts ...
  3. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
  4. Drawdown

    The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted ...
  5. Inverse Transaction

    A transaction that can cancel out a forward contract that has the same value date.
  6. Redemption

    The return of an investor's principal in a fixed income security, such as a preferred stock or bond; or the sale of units ...
Trading Center