Strike Price

1. Definition

The Strike Price (or Exercise Price) is the set price at which a derivative contract can be bought or sold when it is exercised. * For call options, the strike price is the price at which the security can be bought. * For put options, the strike price is the price at which the security can be sold.

2. Importance

It is the most critical variable in options trading because it determines the option's value relative to the current market price of the underlying asset.

3. Moneyness Concept

The relationship between the Underlying Price ($S$) and the Strike Price ($K$) defines the "Moneyness."

• In-The-Money (ITM): The option has intrinsic value.
  • Call: $S > K$
  • Put: $S < K$
• At-The-Money (ATM): The strike price is equal (or very close) to the current market price.
  • $S = K$
• Out-Of-The-Money (OTM): The option has no intrinsic value (only time value). If it expires here, it becomes worthless.
  • Call: $S < K$
  • Put: $S > K$

4. Trade-off

• Deep ITM options: Very expensive premiums, high probability of profit, low leverage.
• Deep OTM options: Very cheap premiums, low probability of profit, massive leverage (Lottery tickets).