Option strike price, also called exercise price, is the fixed price at which an option holder can buy (call option) or sell (put option) the underlying security. The strike price is determined when the option contract is created and remains constant throughout the option's life (except for corporate actions). It serves as the benchmark for determining option profitability and influences both option pricing and trading strategy decisions.
What Is Strike Price
For call options, the strike price establishes the purchase price the holder pays to acquire the underlying asset. For put options, it sets the selling price the holder receives when disposing of the underlying asset. This fixed price characteristic distinguishes options from other derivatives—regardless of market price movements, the strike price remains unchanged from contract creation through expiration.
How Strike Price Works: Calls and Puts
Call Options grant the holder the right to buy the underlying asset at the strike price. This means the call buyer benefits from price increases above the strike price. Profitability occurs when the market price exceeds the strike price at exercise. If a stock trades at $75 with a $60 strike call, exercising generates a $15 per share gain (before premium costs). Call option buyers have theoretically unlimited profit potential since there's no cap on how high the stock price can rise.
Put Options provide the holder the right to sell the underlying asset at the strike price. This creates the opposite payoff from calls—put buyers profit when prices decline below the strike price. If a stock trades at $40 with a $55 strike put, exercising generates a $15 per share gain (before premium costs). Put options are often used as insurance to protect against downside risk in stock holdings.
Moneyness Table:
| Moneyness | Call Option | Put Option | Impact |
|---|---|---|---|
| In-the-Money (ITM) | Market > Strike | Strike > Market | Has intrinsic value |
| At-the-Money (ATM) | Market ≈ Strike | Market ≈ Strike | Minimal or zero intrinsic value |
| Out-of-the-Money (OTM) | Strike > Market | Market > Strike | Zero intrinsic value |
Strike Price Selection and Availability
Exchanges establish available strike prices based on current asset prices and market demand. The Options Clearing Corporation (OCC) standardizes strike price intervals to ensure liquidity.
| Asset Price Range | Typical Strike Interval | Example Strikes |
|---|---|---|
| Under $25 | $2.50 | $10, $12.50, $15, $17.50 |
| $25 - $200 | $5.00 | $50, $55, $60, $65 |
| Over $200 | $10.00 | $200, $210, $220, $230 |
For a stock trading at $100, available strikes might range from $70 to $130, providing approximately 15-20 different strike prices across multiple expiration dates.
Strike Price and Option Value
Intrinsic Value represents the immediate profit available if exercised:
- Call Option: Max(0, Market Price - Strike Price)
- Put Option: Max(0, Strike Price - Market Price)
Premium and Moneyness Impact:
| Strike Selection | Premium Cost | Probability of Profit | Potential Return | Best For |
|---|---|---|---|---|
| Deep ITM | High | Very high (70-80%) | Low (20-50%) | Conservative traders |
| ATM | Medium | Moderate (50-60%) | Medium (100-200%) | Balanced approach |
| OTM | Low | Low (30-40%) | High (200-500%+) | Aggressive traders |
For a stock trading at $100:
- $90 call: Premium $12 (ITM, $10 intrinsic + $2 time value)
- $100 call: Premium $5 (ATM, pure time value)
- $110 call: Premium $2 (OTM, pure time value)
Strike Price Strategy and Examples
How to Choose Strike Prices:
Selecting the appropriate strike price depends on three critical factors: your market outlook (bullish, bearish, or neutral), your risk tolerance (how much you're willing to lose), and your investment objective (income generation, speculation, or hedging).
- Conservative Income: Sell OTM covered calls 5-10% above current price—this allows upside participation while collecting premium with high probability of keeping the shares
- Protective Hedging: Buy ATM or slightly OTM puts within 5% of current price—this protects against downside moves while minimizing insurance costs
- Aggressive Speculation: Buy OTM calls/puts 10-20% from current price—this leverages capital for high potential returns but with lower probability of profit
Call Option Example:
An investor analyzes XYZ Corp trading at $85 with 30 days until expiration and a moderately bullish outlook.
| Strike Price | Premium | Breakeven | Profit at $95 |
|---|---|---|---|
| $80 (ITM) | $7.50 | $87.50 | $7.50 |
| $85 (ATM) | $4.00 | $89.00 | $6.00 |
| $90 (OTM) | $1.50 | $91.50 | $3.50 |
The $85 strike provides the best balance: $6 profit versus $3.50 for the $90 strike at the target price.
Put Option Example:
An investor owns 100 shares of ABC Inc trading at $120 and wants downside protection with maximum loss at $110.
| Strike Price | Premium | Protection Level | Cost as % of Stock |
|---|---|---|---|
| $120 (ATM) | $5.00 | Starts at $115 | 4.2% |
| $115 (OTM) | $2.50 | Starts at $112.50 | 2.1% |
| $110 (OTM) | $1.00 | Starts at $109 | 0.8% |
The $115 strike aligns with the risk tolerance—a $2.50 premium provides protection with maximum loss of $7.50 per share.
Strike Price Adjustments
Strike prices remain fixed except for adjustments due to specific corporate actions. The Options Clearing Corporation (OCC) automatically adjusts strikes to maintain economic equivalence and protect both option holders and writers.
Corporate Actions Triggering Adjustments:
- Stock splits: Strike prices divided by split ratio (example: 2-for-1 split divides strike by 2)
- Reverse splits: Strike prices multiplied by reverse ratio (example: 1-for-10 split multiplies strike by 10)
- Special dividends: Strike prices reduced by dividend amount to prevent windfall gains
- Mergers and acquisitions: Adjusted based on specific transaction terms
Example Adjustment (2-for-1 Stock Split):
- Original: 1 contract, $100 strike, 100 shares per contract
- Adjusted: 2 contracts, $50 strike, 100 shares per contract
- Economic value: Unchanged—the holder still controls 100 shares at the same total cost
Frequently Asked Questions
What is the difference between strike price and market price? Strike price is the fixed exercise price in an options contract, while market price is the current trading price of the underlying asset. The strike price remains constant while market price fluctuates continuously.
How do I choose the right strike price for my strategy? Select based on your market outlook, risk tolerance, and objective. Use in-the-money strikes for conservative approaches with higher probability, at-the-money for balanced risk/reward, and out-of-the-money for aggressive strategies with higher potential returns.
Why are some strike prices more liquid than others? Strikes near the current market price (at-the-money) have the highest trading volume and liquidity. Strikes at round numbers ($50, $100, $150) also tend to be more liquid due to psychological preferences and institutional trading patterns.
Do all options have the same strike price intervals? No, strike price intervals vary based on the underlying asset's price level and volatility. Lower-priced securities use $2.50 intervals, mid-range stocks use $5.00 intervals, and higher-priced securities have $10.00 or wider intervals.
Key Takeaway
Strike price selection is fundamental to options trading success. The strike price determines intrinsic value, influences premium costs, and establishes the risk/reward profile for your trade. Understanding how to match strike prices to your market outlook and risk tolerance—whether using in-the-money, at-the-money, or out-of-the-money options—is essential for effective options strategies. When combined with proper vesting schedules and equity compensation planning, strike prices help optimize both investment returns and personal wealth management.