(Most trading options are American options. The underlying asset can be bought or sold at any time. However, there are also “European” options that can only be exercised at the expiration of the contract).
However, it is worth knowing that there are also so-called European options that can only be exercised on expiry of the contract).
There are two main types of options. A call that gives the right to buy and a put that gives the right to sell.
Option Strike Price Definition
A call option’s strike (or exercise) price is a fixed price at which the holder can purchase the underlying stock or financial instrument at some point in the future. Similarly, the put strike price is the price at which the stock/commodity can be sold.
option market
Options are quoted through the options chain on the Chicago Board Options Exchange (CBOE) and respectively:
- Underlying security (usually, but not always, stocks such as AAPL)
- Option type: call (right, but not obligatory, to buy the underlying asset) or put (right, but not obligatory, to sell the underlying asset)
- date of expiry: if the option must be used before it expires. The option is time limited as it can only be used until this set expiration date.
- strike priceAlso known as the strike price, it is the price at which the underlying asset can be bought (call) or sold (put).
Let’s see an example:
Suppose, through a broker, through an options chain like the one above, the following options are presented: Nov 20 200 Call 1.50
In other words, the underlying asset is AAPL (Apple stock), which is a call option with an expiration of November 2020 and a strike price of $200. The price per option is $1.50.
Option contracts are typically made up of blocks of 100, so one contract costs $150 ($1.50 x 100) and costs $20,000 ($200 x 100) anytime between now and November 2020 You can buy 100 AAPL shares at
Why Strike Prices Matter
In the example above, if you instead saw the following options: AAPL Nov 20 180 Call
This is the same as before, but the right to buy now is to buy for $180.
Do you think this is worth more or less to the owner? Of course it’s worth more, so expect the quoted price to be much higher than $1.50 (depending on current share price and implied volatility) .
money
Strike prices are also related to the concept of monetaryity.
If the strike price and the current stock price are the same, the option is at the money.
If the strike price is lower (for calls) or higher (for puts) than the current price, you are in the money. If the strike price is high (for calls) or low (for puts), you are out of the money.
For example, if Apple’s stock price is $190, the AAPL Nov 20 200 call is out of the money, but the AAPL Nov 20 180 call is in the money.
Conclusion
An option’s strike price indicates the price at which the underlying security can be bought (for a call) or sold (for a put) before the contract expires. The difference between the strike price and the current market price is called the option’s “moneyness” and is a measure of its intrinsic value. In-the-money options have intrinsic value because they can be exercised at a strike price better than the current market price for a guaranteed profit. Out-of-the-money options have no intrinsic value, but still contain extrinsic or time value as the underlying asset may go on strike before expiration. At-the-money options have a strike price at or very close to the current market price and are often the most liquid and active contracts in the name.
About the Author: Chris Young has a degree in Mathematics and 18 years of experience in finance. Chris is from the UK, but he has worked in the US and most recently in Australia. His interest in options was first aroused by the “Trading Options” section of the Financial Times (London). He was determined to spread this knowledge to more people and in 2012 he founded Epsilon Options.
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