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Options trading is a very popular hedging and speculation strategy on the market. Traders can buy and sell call/put options on virtually any tradable asset, which makes options very versatile.
However, they also come with a degree of risk, as an options contract is structured in a time-sensitive manner in which the price of the underlying asset must meet the strike price of the options contract.
Strike price is the predetermined price at which the holder of an option can buy (in the case of a call option) or sell (in the case of a put option) the underlying asset when exercising the option.
It is an integral component of any options contract and is the threshold that determines the profitability of the contract.
Understanding what a strike price is and how to choose the right price is integral in devising a profitable options trading strategy.
If you are a beginner trader and would like to know more about what a strike price is and how it works in options trading, this Investfox guide can help.
Strike price is an important part of options trading and largely determines the viability of an options contract.
To better understand how strike prices work, let’s look at the components and factors that define them:
Depending on the period of time in the lifecycle of an options contract, the contract may be in-the-money, at-the-money, or out-of-the-money.
Here’s what each means for traders:
As already mentioned, the strike price is a crucial part of any options contracts. To further break down the importance of strike prices in options trading, we can highlight the following aspects:
The strike price in options trading is determined when the contract is created by the options exchange, often based on the current market price of the underlying asset. It's not adjustable by traders and is set to provide various options for different market conditions and investor preferences.
The strike price is crucial in options trading because it determines the price at which an underlying asset can be bought or sold. It influences profitability, risk exposure, and strategy selection, making it a fundamental factor in option pricing and trading decisions.
When the strike price of a call option is higher than the current market price of the underlying asset, the option is considered out-of-the-money (OTM). In this scenario, the option has no intrinsic value and is typically not exercised, resulting in a loss of the option premium paid.