Strike Price

The strike price, also called the exercise price, is the fixed price at which an option holder can buy (with a call) or sell (with a put) the underlying asset. It is the single most important choice when picking an option, because it decides how much the option costs, how likely it is to pay off and how much it can make. Options on the same underlying and expiry are listed at many strikes, and each behaves differently.

How strikes are listed#

Exchanges list strikes at set intervals around the current price, for example every $1, $2.50 or $5 for stocks, depending on the price and how actively the options trade. Heavily traded underlyings, such as major index ETFs, may have strikes every $1 across a wide range. New strikes are added as the price moves.

Strike and moneyness#

Where the strike sits relative to the current price determines whether an option has intrinsic value. See Moneyness: ITM, ATM and OTM.

How the strike changes the trade#

The pattern: lower strike calls cost more but need less movement to profit; higher strike calls are cheaper with bigger percentage payoffs, but the stock must move further.

Strike and probability#

A rough guide to the market's view of the chance an option finishes in the money is its Delta. An at the money option has a delta near 0.50, roughly a coin flip. A far out of the money option with a delta of 0.10 has roughly a 10% chance of finishing in the money, by that rough measure. Cheap options are cheap for a reason.

Choosing a strike#

Also consider:

• Your price target: where do you expect the underlying to be, and by when?
• Liquidity: strikes near the money usually have the tightest spreads.
• Volatility skew: strikes can carry different implied volatilities. See Volatility Smile and Skew.

Strikes in spreads#

Multi leg strategies use more than one strike. A bull call spread buys one strike and sells a higher one, capping both cost and profit. The distance between strikes sets the maximum gain or loss. See Vertical Spreads.

Common mistakes#

• Always buying the cheapest out of the money options, which rarely pay off.
• Ignoring break even: a call is not profitable at expiration just because the stock is above the strike.
• Trading illiquid strikes with wide spreads.
• Choosing a strike without a price target and timeframe.

Frequently asked questions#

What is a strike price in options?#

The fixed price at which the option holder can buy (call) or sell (put) the underlying asset.

Which strike price should I choose?#

It depends on your target, timeframe and risk. In the money options cost more but need less movement; out of the money options are cheaper but less likely to pay off.

Can the strike price change?#

Normally no. Strikes can be adjusted for corporate actions such as stock splits or special dividends, so that the contract keeps its value.

Next, learn what goes into an option's price in Option Premium.