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Liquidity is an important factor to consider when trading options because it affects the efficiency of entering or exiting a position, as well as the transaction costs associated with trading. What we’re talking about here is liquidity. The final reason to carefully consider the strike price of any options contract you trade is in the event you wish to sell the contract back on the market. A well-chosen strike price can help you maximize the benefits of both intrinsic and time value, which can contribute to the overall profitability of your option trades.

Intrinsic value represents the immediate profit potential if the option were exercised, while time value represents the option’s potential for future profitability.

This is where time value and intrinsic value need to be considered, both of which are affected by the strike price. Intrinsic Value and Time Valueīut there are other reasons that options traders need to have a solid grasp on the principles of strike prices. This is a classic case of risk/reward that you’ll have to answer for yourself. As a result, your profit potential is lower.Īll of this is to say that there is a balance between choosing a strike price that favors you, but leaves you enough room to make money on the trade should you end up exercising the option. We know what you’re thinking…can’t I just choose options contracts with strike prices close to the current market price and make it easier to get “in the money”? Sure, you could – but because these types of “at the money” contracts are more favorable, they cost more in premium. But as you’ll learn below, that’s just one of the reasons choosing the right strike price for your options contract can’t be overlooked… Risk-Reward Balance Now that you have a better understanding of options strike price, we want to explain why this particular component of your options contract is so important.Īs you may already be able to surmise, this is one of the factors that influence your likelihood of being profitable in the trade. Why Choosing the Right Options Strike Price is so Important If the share price doesn’t go above $55, you can let the option expire, and your loss would be limited to the cost of the option premium. If Company XYZ’s share price rises to $60 before the option expires, you could exercise your call option and buy shares at the $55 strike price, making an instant profit of $5 per share (minus the cost of the option and any fees). By purchasing this call option, you’re securing the right to buy shares of Company XYZ at $55 per share, regardless of its market price, until the option expires. You find an option with a strike price of $55 and an expiration date one month from now. Imagine you’re interested in buying a call option for Company XYZ, which is currently trading at $50 per share. You came here to learn what the strike price is in options trading with examples, and we’ve got an example below to help illustrate this better: We haven’t even discussed the expiration date yet, but that’s an integral part of your options contract too – as we’ll discuss in greater detail later on. Puts give you the right (but not the obligation) to sell an underlying stock at the strike price, whereas calls give you the right (but not the obligation) to buy an underlying stock at the strike price. There are two types of options contracts – puts and calls. What does it mean to exercise stock options, though? For those who are new to this style of trading, let’s take a step back and discuss how stock options work. Should your theory prove true and the stock price does rise above or fall below the strike price, your options contract is “in the money” and exercising it would mean you earn a profit. The strike price is the pre-determined price for which the stock in question must rise above or fall below – depending on which type of options contract you’re trading. When you purchase an options contract, you’re making an educated guess as to how the price of a stock is going to move – either up or down.

It’s the price point at which your contract will become profitable. The strike price – sometimes referred to as the exercise price – is an integral part of any options contract. Options Jumpstarter | Options Paycheck | The Efficient Options Buyer What is Strike Price in Options Trading? With Examples to Fully Explain the Stock Options Strike Price Meaning