Strike Price Explained

Strike Price

Definition:
The strike price is defined as the price at which the holder of an options can buy (in the case of a call option) or sell (in the case of a put option) the underlying security when the option is exercised. Hence, strike price is also known as exercise price.

Strike Price, Option Premium & Moneyness

When selecting options to buy or sell, for options expiring on the same month, the option’s price (aka premium) and moneyness depends on the option’s strike price.

Relationship between Strike Price & Call Option Price

For call options, the higher the strike price, the cheaper the option. The following table lists option premiums typical for near term call options at various strike prices when the underlying stock is trading at $50

Relationship between Strike Price & Put Option Price

Conversely, for put options, the higher the strike price, the more expensive the option. The following table lists option premiums typical for near term put options at various strike prices when the underlying stock is trading at $50

Strike Price Intervals

The strike price intervals vary depending on the market price and asset type of the underlying. For lower priced stocks (usually $25 or less), intervals are at 2.5 points. Higher priced stocks have strike price intervals of 5 point (or 10 points for very expensive stocks priced at $200 or more). Index options typically have strike price intervals of 5 or 10 points while futures options generally have strike intervals of around one or two points.

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Effect of Dividends on Option Pricing

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