The strike price, also called the exercise price, is the fixed price at which an options contract lets the buyer purchase or sell the underlying asset.
- A call option gives the buyer the right to buy the asset at the strike price.
- A put option gives the buyer the right to sell the asset at the strike price.
The buyer can choose whether to exercise the option. The seller must fulfill the contract if the buyer exercises and the seller is assigned.
For standard U.S. equity options, one contract generally represents 100 shares. Adjusted contracts and index options can have different terms.
Strike Price at a Glance
| Term | Meaning |
|---|---|
| Strike price | The agreed price for buying or selling the underlying asset |
| Call option | The right to buy at the strike price |
| Put option | The right to sell at the strike price |
| Premium | The price paid to buy the option |
| Expiration date | The date when the option contract ends |
| Underlying asset | The stock, ETF, index, currency or other asset linked to the option |
How the Strike Price Works for a Call Option
A call option gives the buyer the right to buy the underlying asset at the strike price.
Example:
- Stock price: $50
- Call strike price: $55
- Call premium: $2 per share
If the stock rises to $65 at expiration, the call buyer can buy shares for $55 even though the market price is $65. The call has $10 of intrinsic value per share.
For one standard contract:
- Intrinsic value: $10 × 100 = $1,000
- Premium paid: $2 × 100 = $200
- Approximate profit at expiration: $800
The call buyer's break-even price is:
Strike price + premium = $55 + $2 = $57
The stock must rise above $57 at expiration for the buyer to make a profit, excluding transaction costs. Before expiration, the option itself may be worth more than the premium paid because it can still contain time value.
How the Strike Price Works for a Put Option
A put option gives the buyer the right to sell the underlying asset at the strike price.
Example:
- Stock price: $50
- Put strike price: $45
- Put premium: $1.50 per share
If the stock falls to $35 at expiration, the put buyer can sell at $45 while the market price is $35. The put has $10 of intrinsic value per share.
The put buyer's break-even price is:
Strike price − premium = $45 − $1.50 = $43.50
The stock must fall below $43.50 at expiration for the buyer to make a profit, excluding transaction costs.
In-the-Money, At-the-Money and Out-of-the-Money Options
The relationship between the underlying asset's market price and the strike price determines an option's moneyness.
| Option status | Call option | Put option |
|---|---|---|
| In the money | Stock price is above the strike price | Stock price is below the strike price |
| At the money | Stock price is approximately equal to the strike price | Stock price is approximately equal to the strike price |
| Out of the money | Stock price is below the strike price | Stock price is above the strike price |
If a stock trades at $50:
- A $45 call is in the money.
- A $50 call is at the money.
- A $55 call is out of the money.
- A $55 put is in the money.
- A $50 put is at the money.
- A $45 put is out of the money.
An option being in the money does not automatically mean the buyer is profitable. Its intrinsic value must exceed the premium paid.
Strike Price Versus Option Premium
The strike price is the contractual buying or selling price. The premium is the market price of the option itself.
For example:
- A call can have a $50 strike price.
- Its premium might be $3 per share.
- One standard contract would cost approximately $300, calculated as $3 × 100 shares.
The premium is affected by factors such as:
- The underlying asset's current price compared with the strike price
- The time remaining until expiration
- Expected volatility
- Interest rates and dividends
- Supply and demand in the options market
The strike price is one input in option pricing. It is not the amount paid to buy the option.
How to Choose a Strike Price
The right strike price depends on the strategy and the trader's objective.
Buying a Call
A trader buying a call may choose among:
- In-the-money calls: These have more intrinsic value and usually cost more.
- At-the-money calls: These can offer a balance between cost and sensitivity to the stock's price.
- Out-of-the-money calls: These usually cost less upfront, but the stock must make a larger move before the option has intrinsic value.
An out-of-the-money call is not automatically a better choice because it is cheaper. Its lower premium reflects the lower chance, with other factors held constant, that the option will finish in the money.
Buying a Put
A put buyer may choose:
- An in-the-money strike for more intrinsic value and a higher premium
- An at-the-money strike for a balance between cost and price sensitivity
- An out-of-the-money strike for a lower premium and a larger required price decline
Selling Options
For an option seller, the strike price determines the obligation if assignment occurs:
- A short call seller may have to sell shares at the strike price.
- A short put seller may have to buy shares at the strike price.
Selling options can involve significant risk. An uncovered call, for example, can create theoretically unlimited losses if the underlying asset rises sharply.
What Happens at Expiration?
At expiration:
- A call has intrinsic value when the underlying price is above the strike price.
- A put has intrinsic value when the underlying price is below the strike price.
- An out-of-the-money option generally expires worthless.
- The buyer can lose the full premium paid.
- The seller may keep the premium if the option expires worthless.
Many traders close an option position by selling the option before expiration instead of exercising it. Exercising a stock option can result in buying or selling the underlying shares. Some index options are cash-settled instead.
The Simplest Way to Remember the Strike Price
Think of the strike price as the locked-in transaction price:
- Call: "I can buy at this price."
- Put: "I can sell at this price."
A favorable move beyond the strike price can increase the option's value, but the buyer must also recover the premium paid. Before trading, check the strike price, premium, expiration date, contract multiplier and exercise or settlement terms.