What Is Strike Price in Options Trading How It Impacts Your Trades

Strike price is the set price at which the holder of an option can buy (call) or sell (put) the underlying asset upon exercise. This page explains the meaning of strike price, its impact on option value and trade strategy, and the practical considerations for choosing the most suitable strike.

Begin by clarifying what strike price means and why it matters:
An option’s strike price, sometimes called exercise price, is the predetermined level at which the contract can be exercised. It directly determines whether an option has intrinsic value and influences its price and payoff.

The strike price is crucial in options trading as it determines the profitability of a trade. It helps assess whether an option is in-the-money, at-the-money, or out-of-the-money, directly influencing its value and premium. Choosing the right strike price aligns with your market view, risk tolerance, and strategy. It also impacts potential returns and losses, making it a key factor in effective options planning and risk management.

Here’s how strike price determines key pricing factors and trade outcomes:

Intrinsic Value

This represents immediate exercise value:

• Intrinsic value (call) = Max(Spot Price – Strike Price, 0)
  

• Intrinsic value (put) = Max(Strike Price – Spot Price, 0)

Time Value

Time value is the extra premium above intrinsic value, reflecting the potential to gain before expiry. It decreases over time and depends on volatility.

Impact on Profit Potential and Risk

• ITM options: higher premium, higher chance of profit, lower leverage.
  

• OTM options: lower premium, higher leverage but higher risk of expiry worthless.Higher-strike (call) options cost less but require larger market moves to profit.

Here are factors to consider when choosing a strike price:

Based on Market Outlook

Strike choice depends on expected direction and magnitude of move.

• Bullish view: pick strikes slightly above (OTM) or near (ATM) current price.
  

• Cautious outlook: choose ITM strikes for higher probability.
  

Based on Risk Tolerance

Lower-risk traders might prefer ITM strikes; high-risk, high-reward traders might choose far OTM strikes.

Based on Cost and Premium

Strikes closer to the spot are pricier; further ones are cheaper. Balance outlay against probability of payout.

Moving on, here’s how strike price affects moneyness classification:

In‑the‑Money At‑the‑Money Out‑of‑the‑Money

• In‑the‑Money (ITM): Call strike below current price; put strike above current price.
  

• At‑the‑Money (ATM): Strike equals the current price.
  

• Out‑of‑the‑Money (OTM): Call strike above current price; put strike below current price.
  

These categories help determine the option’s intrinsic value or lack thereof.

The strike price is the fixed price at which an option holder can buy (call option) or sell (put option) the underlying asset. Here's a brief example to understand it better:

1. Suppose you buy a call option on a stock with a strike price of ₹500. If the stock’s market price rises to ₹550, you can buy it at ₹500, earning a profit (excluding premium paid).
   

2. In a put option, if the strike price is ₹500 and the stock price drops to ₹450, you can sell it at ₹500, again making a profit.
   

The strike price helps determine whether the option is in-the-money, at-the-money, or out-of-the-money, impacting its value and potential returns.

Several factors influence the choice of strike price when trading options:

• Market Price of the Asset: Strike prices are usually selected based on how close they are to the current market price—traders may choose in-the-money, at-the-money, or out-of-the-money options depending on strategy.
  

• Volatility: Higher volatility increases the likelihood of large price movements, which may affect the attractiveness of different strike prices.
  

• Time to Expiry: The longer the time to expiry, the more potential for price movement, influencing the selection of strike prices.
  

• Risk Appetite: Conservative traders may prefer strike prices closer to the current price, while aggressive traders might opt for farther strikes seeking higher returns.
  

• Premium Cost: Strike prices also affect the option premium; in-the-money options have higher premiums, while out-of-the-money options are cheaper.

Strike price is a central component in options trading. It shapes an option’s value through intrinsic and time components, affects risk and reward profiles, and guides strategy decisions. Understanding strike price classifications and exchange conventions can help manage expectations and select suitable contracts when trading.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.