What is a Strike Price

The strike price (also known as the exercise price) is the price at which the buyer of an option can buy (in the case of a call option) or sell (in the case of a put option) the underlying asset if they choose to exercise the option. This price is set when the contract is created and remains fixed throughout the option’s duration.

The strike price is crucial because it determines the difference between the current market price of the underlying asset and the price at which the option can be exercised. Depending on the relationship between the market price and the strike price, the option can be classified as in the money (ITM), at the money (ATM), or out of the money (OTM):

1. In the Money (ITM):
   • For a call option, the strike price is below the current market price of the underlying asset.
   • For a put option, the strike price is above the current market price.
2. At the Money (ATM): The strike price is approximately equal to the current market price of the underlying asset.
3. Out of the Money (OTM):
   • For a call option, the strike price is above the current market price.
   • For a put option, the strike price is below the current market price.

These classifications directly impact the option’s value and the likelihood that it will be in the money at expiration, thus having intrinsic value.