Strike Price
The price at which an option contract can be exercised.
Also called: strike · exercise price
Written by Javier Sánchez Ros
In plain language
The strike is the fixed reference point of the contract. For a call it is the price you may buy at; for a put, the price you may sell at.
Where the strike sits relative to the current price determines the option’s character. Strikes far out of the money are cheap, low-probability bets; strikes deep in the money behave much more like the underlying.
Strike selection is a bigger determinant of outcome than most beginners expect — often more important than getting the direction right.
Worked through
Three strikes on the same bullish view, stock at $58
- $55 call
- $4.20 — already in the money
- $60 call
- $1.80 — needs +3.4%
- $70 call
- $0.22 — needs +20.7%
- Break-even on the $70
- $70.22
The $70 call is cheap for a reason that the price tag hides: it requires the stock to rise more than a fifth, before expiry, merely to be worth anything at all. Break-even is $70.22, so even a 20% rally to $69 pays exactly zero.
The cheapness is what makes it attractive and it is the same thing as the improbability. Options are priced by the market’s estimate of how likely each outcome is, so a strike that costs a tenth of another is, roughly speaking, being judged far less likely to pay.
The $55 call is the opposite trade dressed in the same thesis. It costs more, moves closer to one-for-one with the stock, and pays on a modest rise — less leverage, far less dependence on being right about the size of the move.
Choosing a strike is therefore not about what fits the budget. It is a statement about how far and how fast, and the trader who buys the cheapest strike is usually making a much more specific prediction than they realise.
Why it matters
The distance between the current price and the strike sets how much the underlying must move, and how fast, for the trade to work at all.
Common mistakes
- Choosing far out-of-the-money strikes because they look cheap.
- Ignoring that a low-priced option usually reflects a low probability of paying off.
Keep exploring
These concepts are connected. Understanding one usually makes the next one easier.
A contract giving the right, but not the obligation, to buy an asset at a set price before expiration.
A contract giving the right, but not the obligation, to sell an asset at a set price before expiration.
An option that currently has intrinsic value.
An option with no intrinsic value, whose entire premium is time and volatility.
How much an option’s price moves for a $1 move in the underlying.