trading

strike price

The predetermined price at which the holder of an options contract can buy (call) or sell (put) the underlying security.

Example

“With a strike price of $100 and the stock at $120, the call option was $20 in the money.”

Memory Tip

STRIKE price = the price STRUCK in the options contract. Your guaranteed buy or sell price.

Why It Matters

The strike price is crucial because it determines your profit or loss potential when trading options. Understanding strike prices helps you evaluate whether an options contract offers good value and how much the underlying security needs to move for you to make money.

Common Misconception

Many people think the strike price is the same as the current market price of the security, but they are different values. The strike price is fixed when you buy the option, while the market price changes constantly based on supply and demand.

In Practice

If you buy a call option on stock XYZ with a strike price of 50 dollars and the stock rises to 60 dollars, you can exercise your right to buy shares at 50 dollars and immediately sell them at 60 dollars for a 10 dollar per share profit. However, if the stock stays below 50 dollars, your call option expires worthless because you would not want to buy at the higher strike price.

Etymology

STRIKE = an agreement or deal. The PRICE at which the deal is STRUCK (agreed upon).

Common Misspellings

strike-pricestrike prisestrike prce

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