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What Is a Strike Price in Option Trading?

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Written by Timothy Sykes
Updated 5/18/2023 9 min read

A strike price in options trading is the minimum price point at which you can execute the option. It’s one of the most basic concepts when it comes to trading options contracts.

Building your knowledge account is always a good thing. Even if you’ve got a basic grasp of the strike price concept, a refresher won’t hurt. Who knows, you might learn something new.

This post will cover the basics of strike price and how to set a good strike price. I’ll also give you an example of strike prices in action. Let’s get into it!

What Is a Strike Price?

A strike price defines when an option holder can trade the contract’s underlying security. That means the market price has to reach the strike price if you want to exercise the options contract.

Options contracts are usually listed with various strike prices. These prices can be above or below the underlying asset’s market value at the time the option is written:

  • Strike prices above the asset’s price at contract inception are usually call options.
  • Strike prices below the asset’s price at contract inception are usually put options.

Exchanges generally sell options at a range of strike prices. Different brokerage services and exchanges may have different strike price intervals. The interval between strike prices is called “strike width.”

Here’s an example of a strike width:

Put options for Company X stock are sold at $107.50, $105, $102.50, and so on. The interval between strike prices — the strike width — is $2.50.

Learning the lingo is one of the most important things in options trading. Check out my guides on basic options trading terminology like margin and buy-to-open.

Relationship Between a Strike Price and an Underlying Security

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The relationship between a strike price and its underlying asset is its moneyness. What does moneyness mean? It’s the value of an option in its current state.

An option is considered ‘in-the-money’ if it can be exercised — if its current price has exceeded its strike price. It’s ‘out-of-the-money’ if it cannot be exercised — if the current price hasn’t reached the strike price. It can also be ‘at-the-money’ if the current price matches the strike price.

Here’s an illustration of an option’s moneyness. Say, you have three call options for Company Y stock with the same time to expiration. They have the following strike prices:

  1. Contract 1: $90
  2. Contract 2: $100
  3. Contract 3: $110

For this example, let’s say the market price at expiration for Company Y stock is $100 per share. In this case:

  • Contract 1 is in the money because the option can be exercised for a profit.
  • Contract 2 is at the money because it’s exactly or really close to the current share price. It can be exercised, but at this point it’s essentially worthless.
  • Contract 3 is out of the money — the option cannot be exercised.

Out of the money options aren’t necessarily worthless. They can have value if the asset has sufficient volatility and time until expiration. You can sell the contract to somebody else who still believes the asset price might hit its strike price.

Does your options trading strategy factor in taxes? Learn more about the tax implications of options trading.

How to Choose a Strike Price in Options Trading

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Choosing your strike price is one of the most important things for an options buyer.

You can’t just pick a random price and expect to make successful trades. Here are three things to do when choosing strike prices:

1. Consider Your Strategy

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A well-made options strategy should help you decide when and at what price you enter an options trade. Your strategy also defines your risk tolerance. Examining your strategy means you can set strike prices matching your risk appetite.

2. Monitor Volatility and Implied Volatility

The underlying asset’s volatility impacts an option’s value. It also influences its moneyness.

Meanwhile, implied volatility influences the contract’s premium. The higher the implied volatility, the more options owners have to pay.

3. Do the Research

Studying hard and doing your homework are among the most important things in trading. Analyze the assets you’re buying options for to get a good feel of how their prices move.

You should be learning about chart patterns from experienced traders — like my former student Mark Croock. Mark has racked up $4 million in career earnings, mostly from trading options. He’s done this by adapting my penny stock trading strategies to options.

Now he’s got his own mentorship program, called the Evolved Trader. Check it out for strategy sessions, trade alerts, a great chat room, and more!

Any kind of trading is risky, but certain options strategies have much more risk than others. Learn more about why options trading is risky in my article.

Strike Price Scenario Examples

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The following strike price scenarios will give you an idea of how professional options traders set their strike prices.

I’ll give you two strike price scenarios as an options holder. One for call options and one for put options.

Let’s take a look:

Call Option Scenario

Company Y’s stock price is $5 per share. You expect it to rise within the next month, so you buy a call option to buy 100 shares at $5.50 each.

That means your strike price is $5.50.

If Company Y’s stock price goes above $5.50 — if it’s in the money — you can exercise the option. That means you can buy 100 shares of stock at the strike price and make money by selling it at a higher price.

But if you’re wrong and Company Y’s stock price doesn’t reach the strike price, you can ignore the contract. The only money you’ll lose is the option premium.

Put Option Scenario

Let’s say you predict Company Y’s stock price — currently at $5 — will fall in the coming month. You buy a put option to sell 100 shares of Company X stock at $3 each.

Your strike price here is $3.

However low Company X’s stock prices go, you can still sell your optioned shares at $3.

If the stock doesn’t hit the strike price, you can either trade the option or allow it to expire worthless.

Learn more about how options trading works in this article.

Strike Price vs Spot Price

The main differences between strike price and spot price are timing and fluidity. The word “spot” in trading and finance usually means “right now,” so a spot price represents the current market price. Meanwhile, a strike price represents the price when your option contract can be exercised.

Spot prices are fluid. They change according to market conditions. 

Strike prices are static. You set it for a certain number, and you won’t be able to change it. 

Strike Price vs Market Price

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Market price and spot price can be used interchangeably. They both represent the current price of an asset or option on the market. So, the differences between strike price and market price are timing and fluidity.

Strike Price vs Exercise Price

Strike price and exercise price refer to the same thing. So, there are no differences between these two terms.

Key Takeaways

A strike price determines when you can exercise your options contract. You want current market prices — the underlying asset’s spot price — to be above the strike price for call options.

Meanwhile, you want market prices to fall below the strike price for put options. If market prices don’t reach the strike price when the option expires, it’ll expire worthless.

Understanding how to set the right strike price is essential when trading options.

It’s just one part of a self-sufficient trader’s strategy.

You should also follow these trading tips:

  • Don’t copy other people’s trades and alerts. Every person trades differently, and what works for them might not work for you.
  • Learn from experienced options traders. Make sure they show their trades, like Mark does.
  • Make watchlists. Spot new trading opportunities in the options market by doing research. Sign up for my NO-COST weekly watchlist here.
  • Record your trades and review them regularly. This helps you improve your skills and fix your mistakes.

Consider articles like this your education. I hope this is just the start!

Did you pick up any tips about how to set your strike price? Let me know in the comments!

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Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (888) 878-3621 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”