Strike options meaning9/17/2023 ![]() ![]() Call options with strike prices below the current stock price is regarded as in the money. However, these call options are excellent speculative positions if you expect a stock to move strongly as they are extremely cheap. Call options with strike prices above the current stock price are regarded as out of the money and would have no current value when exercised because the stock price is lower than the price the call options allow you to buy it at. This alone governs the nature of how each option is priced and what trading purpose they fulfill. Moneyness is the strike price of an option in relation to the price of the underlying stock. The main implication of strike prices in options trading is that it governs the "Moneyness" of each options contract. It is only by having multiple strike prices that options traders would always be able to find an option to trade that fulfills their investment, trading or hedging purpose. How about doing something like a mark to market process in futures trading by moving that one strike price to the market price of the underlying stock at the end of each day? If thats the case, how then would hedgers or traders who want the right to buy or sell the underlying stock at a particular fixed price as a hedge on their stock positions be able to do so if the strike price keeps changing? If there are no strike prices but simply one call option and one put option for each stock, then what is the "fixed price" that the underlying stock would be traded at if the option is exercised? Even if there is just one strike price for call options and put options for each month, that one strike price would eventually go so much out of the money that it is no longer worth owning in the first place or that it would go so much in the money that eventually, it would lose its leverage and hedging purpose as it would have become far too expensive. Secondly, multiple strike prices also allows the options trader to trade according to the expected volatility of the underlying stock, buying more out of the money strike prices if the stock is expected to move strongly or buying more in the money strike prices if the stock is expected to move only very slightly. Such a strategy would not be possible without multiple strike prices. A Bull Call Spread requires buying call options at a lower strike price and writing call options at a higher strike price in order to reduce capital outlay on a moderately bullish outlook. Take the popular bullish options strategy, Bull Call Spread, for instance. Well, the strike price system in options trading is exactly what makes options trading much more versatile than futures trading.įirst of all, most of the options strategies, both basic and advanced ones, are made possible only because there are multiple strike prices. When you read about an option being April$46Call, that $46 in the quote refers to the strike price, not the price of the call option.įutures traders starting on options trading usually have the one same complain, "Why can't there be just one call option and one put option for each expiration month just like there is only one futures contract to be bought for each expiration month in futures trading?". For example, a call option with a strike price of $50 allows you to buy the underlying stock at $50 anytime prior to expiration no matter what price that stock is then while a put option with a strike price of $50 allows you to SELL that underlying stock at $50. ![]() The strike price of an options contract is the price that the underlying asset is agreed to be traded at. Remember that stock options allow you to buy or sell the underlying stock at a fixed price before expiration? Well, Strike Price is that "fixed price". This tutorial shall explore what strike prices are in options trading, the implications of these different strike prices and why strike price intervals are different for different stocks. ![]() However, almost all of them are surprised to see that there isn't one call option or put option to buy but a whole range of them listed across many strike prices. Everyone new to options trading know that buying call options on stocks going up and buying put options on stocks going down returns a leveraged profit. One of the things about options trading that immediately baffle new options traders is the range of strike prices, or also known as Exercise Price, that are available. The price at which an options contract allows you to trade the underlying asset at. Learn about what Strike Prices are in Options Trading, how they are determined and how they affect your options trading. ![]()
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