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:

• Choice of Strike Price: When you buy or sell an options contract, you choose a specific strike price. This price is set at the time the option is created
• Call Options: If you hold a call option with a specific strike price, it gives you the right (but not the obligation) to buy the underlying asset at that strike price. This is profitable when the market price of the asset is higher than the strike price
• Put Options: If you hold a put option with a specific strike price, it gives you the right (but not the obligation) to sell the underlying asset at that strike price. This is profitable when the market price of the asset is lower than the strike price
• Profit and Loss: The difference between the current market price of the underlying asset and the strike price of your options contract determines your potential profit or loss. For call options, a higher market price is better, while for put options, a lower market price is better
• In-the-Money, At-the-Money, Out-of-the-Money: An option is considered "in-the-money" if it has intrinsic value. It's "at-the-money" when the strike price equals the market price. An option is "out-of-the-money" if it has no intrinsic value
• Expiration: Options have expiration dates. You must exercise them (if profitable) or let them expire worthless if they are not profitable by the expiration date

ITM, ATM, and OTM Options 

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:

• In the Money (ITM): An option where the strike price is favorable for the holder, i.e., it has intrinsic value. For call options, the market price is higher than the strike price; for put options, the market price is lower than the strike price
• At the Money (ATM): An option where the strike price is equal to the current market price of the underlying asset. It has no intrinsic value but may still have time value
• Out of the Money (OTM): An option where the strike price is not favorable for the holder, i.e., it has no intrinsic value. For call options, the market price is lower than the strike price; for put options, the market price is higher than the strike price

The Importance Of The Strike Price In Options Trading

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:

• Determines Profitability: The strike price determines the price at which the holder of the option can buy (for call options) or sell (for put options) the underlying asset. The difference between the strike price and the current market price is a key factor in determining the potential profitability of the options contract
• Defines Intrinsic Value: The relationship between the strike price and the current market price determines whether the option is in-the-money (ITM), at-the-money (ATM), or out-of-the-money (OTM). In-the-money options have intrinsic value, while at-the-money and out-of-the-money options derive their value from time and volatility components

• Strike price determines the profitability of put and call options
• When the strike price is above market price, a call option is ITM, and a put option is OTM 
• The relationship between market price and the strike price determines the intrinsic value of options contracts 
• The difference between the strike price and market price determines if exercising the options contract is viable or not