Strike Price Basics
The strike price is a fixed number that decides when options contracts become profitable.
This number directly shapes an option’s value and what it lets traders do with their trade.
Strike Price vs. Market Price
The strike price gets set when the option contract is made. It won’t change until the option expires.
The market price, on the other hand, moves up and down as the stock trades during the day.
Strike price = Fixed exercise price in the contract (your trade)
Market price = Current trading price of the stock
When you compare these two prices, you can see if your option’s worth anything.
A buy call option is in profit if the market price is higher than the strike price + premium you paid for the trade.
A buy put option is in profit if the market price drops below the strike price – premium you paid for the trade..
Let’s say you have a call option with a $50 strike price, and the stock trades at $55.
That option has $5 of built-in value.
This gap between market and strike price is what gives the option its worth.
Strike Price and Moneyness
Moneyness is just a fancy way to say how the strike price compares to the stock price.
It helps traders figure out where they stand right now.
Moneyness has three possible modes – ITM, ATM and OTM.
In-the-money (ITM) means the option has real value:
- Call options: Market price > Strike price
- Put options: Market price < Strike price
At-the-money (ATM) options have strike prices equal to the market price.
Out-of-the-money (OTM) options have no intrinsic value and need the stock to move in your favor before they’re worth anything.
ITM options cost more because they already have value.
OTM options are cheaper, but you’re hoping for a big move to start making them profitable.
Traders’ biggest problem is to outweigh the cost of option and the chance of stock hitting that strike price – there’s less risk when buying something that’s already valuable (in-the-money) but that luxury comes with a bigger cost.
How Strike Price Works in Calls and Puts
Strike price sets the rights and obligations in both call and put options.
The buyer gets the right to exercise at the strike price, while the seller has to honor the contract if it’s exercised.
This means that if you sold a call – you have to honor your word and actually sell at that price if you are about to be assigned.
The buyer: “Hey, remember when you said that you would sell your stock at that price?”
The seller: “Yes, I remember the deal I made, I’ll sell the stock that I said I would at that price”
This means to honor your word (contract) if the buyer asks you to (buyer exercised his contract).
Call options let you buy the stock at the strike price.
If the market price is higher, you can buy shares for less than they’re worth.
The call seller has to deliver shares at the strike price if assigned.
Put options let you sell the stock at the strike price.
If the market price falls below the strike, you can sell for more than the market pays.
Put sellers have to buy shares at the strike price if assigned.
The strike price is basically the trigger for deciding whether to exercise.
Options usually get exercised near expiration if they’re in the money.
How Strike Price Affects Value
The strike price is a big deal—it controls the option’s premium and how much you could make. It decides if the contract is already valuable or if you’ll need the stock to move in your favor.
Intrinsic Value and Strike Price
Intrinsic value is what you’d get if you exercised the option right now. It’s just the difference between the strike price and the market price.
Call options (both buy call and sell call) have intrinsic value when the stock is above the strike. If the stock’s at $50 and your call strike is $45, you’ve got $5 per share of value.
Put options (both buy put and sell put) have value when the stock falls below the strike. Say you have a put with a $60 strike and the stock’s at $50—that’s $10 in intrinsic value.
No intrinsic value? That’s out of the money (OTM).
Calls are ITM if the strike is below the stock price.
Puts are ITM if the strike is above the stock price.
Calls are OTM if the strike is above the stock price.
Puts are OTM if the strike is below the stock price.
What does this mean for you when you’re trading?
Buyers need the option to move ITM before expiration to profit.
Sellers benefit from OTM (potential profit grows as option expires OTM).
At the money (ATM) means the strike is right at or very close to the market price.
These usually have little or no intrinsic value.
Strike Price and Option Premiums
The premium is what you pay to buy an option OR what you receive for selling an option. It’s made up of intrinsic value and time value.
In the money (ITM) options cost more because they already have value. The further ITM you go, the pricier it gets. For example, if stock is at $50, a call with a $40 strike costs more than a $45 strike.
Time value is what’s left after you subtract intrinsic value.
Other stuff that affects time value:
- Volatility makes all premiums more expensive
- More time until expiration means a higher premium
- Interest rates can nudge option prices up or down
ATM options usually have the highest time value because they have the best shot at ending up in the money – this is useful for LEAP strategy.
Learn here about LEAP STRATEGY
Profit, Loss, and Break-Even
The strike price sets where you could make or lose money. You have to factor in the premium when you figure out your break-even.
Call option break-even = Strike price + Premium paid. Buy a $50 call for $3? You need the stock to hit $53 to break even.
Put option break-even = Strike price – Premium paid. Buy a $50 put for $2? You break even if the stock drops to $48.
Your max loss is what you paid for the option if you’re buying it. That doesn’t change no matter which strike you pick. Still, your odds of losing it all swing a lot based on moneyness.
Risk vs. reward looks different depending on the strike:
- ITM: Higher chance of success, but smaller percentage gains
- OTM: Bigger potential gains, but more risk of losing everything
- ATM: Sits in the middle for risk and reward
Settlement happens when you exercise or sell your option before it expires. The strike price decides the value at exercise, but the market price still affects what you get if you sell early.
How to Pick a Strike Price: Real-World Tips
Choosing the right strike price means weighing your market view, risk comfort, volatility, and what strikes are actually available. The best strategies match the strike price to the market and your own trading experience.
How to Choose Strike Prices
Conservative investors usually pick in-the-money (ITM) strikes. These cost more but offer instant value and a better shot at profit—great for beginners who want some cushion.
Aggressive traders like out-of-the-money (OTM) strikes because they’re cheap and can pay off big. Of course, there’s a higher risk if they expire worthless (they most often do)-
At-the-money (ATM) strikes are a middle ground. They’re not too expensive and still offer a decent chance of success.
If you’re buying calls, conservative folks stick with strikes at or below the stock price. Risk-takers go above, hoping for a big jump.
With puts, safer strikes are at or above the stock price. Riskier ones are below.
Match your strike choice to your timeline. If you don’t have much time, go conservative—there’s less time for the stock to move a lot.
Market Swings, Volatility, and Risk
Implied volatility really matters for strike selection. High volatility makes all options pricier, so expensive ITM strikes might not look great, but cheap OTM options could be tempting.
In calm markets, avoid far OTM options—they probably won’t pay off. ITM options make more sense when things are steady.
When buying puts or calls:
If the market’s moving up fast, higher call strikes can work. If it’s dropping, lower put strikes might pay off
Some quick volatility rules:
- High volatility: Consider selling options with strikes that have a 65-75% chance of expiring worthless
- Low volatility: Buy ITM options for a safer bet
- Moderate volatility: ATM strikes offer a balanced play
Always figure out your breakeven before trading.
For calls, it’s strike plus premium. For puts, it’s strike minus premium.
Experienced traders might use volatility skew to spot mispriced options.
The most important advice:
If you’re new, stick to strikes with good liquidity and tight bid-ask spreads.
