{"id":21,"date":"2015-01-03T15:38:30","date_gmt":"2015-01-03T20:38:30","guid":{"rendered":"\/?p=21"},"modified":"2016-07-05T15:48:58","modified_gmt":"2016-07-05T19:48:58","slug":"strike-prices","status":"publish","type":"post","link":"https:\/\/www2.stockmarketwatch.com\/learn\/options\/basics\/strike-prices\/","title":{"rendered":"03) Strike Prices"},"content":{"rendered":"

In this lesson we\u2019ll be talking about \u201cstrike prices\u201d. \u00a0A strike price is defined as the price at which the given options contracts may be exercised.<\/p>\n

With call contracts<\/b>, it\u2019s the price at which the options trader may buy the underlying stock <\/b>at the time of expiration. \u00a0With put contracts<\/b>, it\u2019s the price at which the options trader may sell the underlying stock<\/b> at the time of expiration.<\/p>\n

Strike price is also referred to as \u201cexercise price.\u201d<\/p>\n

Why Are Options Prices Different for Different Strike Prices?<\/b><\/h2>\n

CALL option contract prices have an inverse <\/b>correlation to the strike price. \u00a0Therefore call contract prices increase in price<\/b> as you decrease in strike price.<\/b><\/p>\n

PUT option contract prices have a direct<\/b> correlation with the strike price. \u00a0Therefore put contract prices increase in price<\/b> as you increase in strike price.<\/b><\/p>\n

In both cases, the increase or decrease in price is due to the 2 main things. \u00a0The option contract\u2019s,…<\/p>\n

    \n
  1. Intrinsic Value <\/b>which is the \u201cin the money\u201d value of the given option. \u00a0So, if you were to buy a call contract where the underlying stock is trading at \u00a0$100 and you choose a strike price of $90 then the intrinsic value of your call options would be $10.<\/li>\n
  2. Extrinsic Value <\/b>which is sometimes called the time value. \u00a0The further out the expiration date of the given options contract, the greater the extrinsic value will be.<\/li>\n<\/ol>\n

    The option contract cost or \u201coption premium\u201d is equal to the intrinsic value + the extrinsic value.<\/p>\n

     <\/p>\n

    What Strike Price Should I Choose?<\/b><\/h2>\n

    This is mostly dependent upon your specific trade strategy.<\/p>\n

    The safer (less risk, less reward) strategy is to choose a strike price that is more in-the-money. \u00a0And the more aggressive strategy (more risk, more reward) is to choose a strike price more out-of the money.<\/p>\n

    And, here\u2019s a quick refresher on what in-the-money<\/i><\/b> means.<\/p>\n

    For CALLS:<\/b> Underlying Stock\u2019s Price >= Strike Price<\/p>\n

    For PUTS: \u00a0<\/b>\u00a0Underlying Stock\u2019s Price <= Strike Price<\/p>\n

     <\/p>\n

    And, here\u2019s a quick refresher on what out-of-the-money <\/i><\/b>means.<\/p>\n

    For CALLS:<\/b> Underlying Stock\u2019s Price < Strike Price<\/p>\n

    For PUTS: \u00a0<\/b>\u00a0Underlying Stock\u2019s Price > Strike Price<\/p>\n

     <\/p>\n

    Can I Sell My Contracts if the Strike Price is Not In-The-Money?<\/b>
    \nYes, you may sell your contracts whether or not they are in-the-money<\/i><\/b> any time before expiration. \u00a0If they are NOT in-the-money at expiration, they will expire worthless.<\/p>\n