Strike Price

Strike price is the prespecified price that a buyer or a seller of a derivative contract agrees to use to purchase or sell an asset. It is also known as the exercise price. For example, in a call option for an XYZ company stock, the buyer of the contract has the right to purchase the XYZ company stock on or before delivery date for the strike price of X, but not the obligation.

If at the expiration, strike price is above the existing spot/market price, this option contract becomes out-of-the-money and the holder of the contract prefers to y let the contract expire. On the other hand, if the strike price is below the existing market price at the expiration, the contract becomes in-the-money and exercising the contract creates a positive gain for the holder.

For a put option, the holder of the contract has the right, but not the obligation, to sell the stock at the strike price on or before the expiration date. If the existing market price of the stock is below the strike price, put option contract becomes in-the-money and the holder of the contract prefers to exercise it. However, if the strike price is below the market price, the holder of the contract lets the contract expire without exercising it.

Strike Price