Strike Price in Options Trading -Know How to Decide Option Strike Price in Stock Market ! Free Demo Available
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The price on which the stock is currently traded is known as the spot price. The price at which both buyers and sellers agree to buy or sell the stock at some predefined time is called the option strike price. Know more about Strike Price in Options Trading in stock market
What is a Strike Price in Options Trading ?
Almost everyone involved in the derivatives market must know the term Strike Price in Stock Market. The strike price in options trading is a very common term. In simple terms, the option strike price is the agreed-upon price to execute the options. The buyer agrees to buy the stock, and the seller agrees to sell the underlying stock at the strike price. Some traders also know the strike price with a different name - Exercise price. This is because the contracts get exercised at this price.
Example of the Strike Price in Options Trading
Let us understand the concept of the strike price in options trading with an example. Suppose a trader wants to buy call options of a stock that is currently traded at Rs. 100, and options are available with the strike price of Rs. 85. This trader believes that the price will fall in the future and thus wants to sell off the stock.
Another trader has done his calculations correctly and believes that the price will rise from Rs. 100 to Rs. 150. Hence decides to buy the stock. The price at which the seller will sell the stock at the time of expiry is the strike price or the cost to the seller.
Let's say the stock market goes high, and the Option Strike Price closes at Rs. 110. In this case, the buyer will be on the profitable side, as he got the stock at a much lesser price Rs. 85
If the Option Strike Price falls from Rs. 100 to Rs. 50, in this case, the seller is on the profitable side by selling the stock at Rs. 85.
Above mentioned is the simple concept of Strike Price in Options Trading. There are various factors that can have a direct or indirect impact on the strike price. These factors include Risk tolerance, the rate of implied volatility, the volume of the stock etc. help in deciding the strike price of the contracts.
Types of Option Strike Price in the Stock Market
The Strike Price in Options Trading is divided based on how far they are from the current price. Either they are above, below or near the current price. Another way of describing the type of strike price can be whether or not they have any intrinsic value left.
1. In-the-money (ITM) strike price:
When the owner can exercise the option for more or less than its actual cost, that option is considered "in-the-money"
2. At-the-money (ATM) strike price:
If the Option Strike Price is the same as the spot price, then this option is considered "at-the-money"
3. Out-of-the-money (OTM) Strike price:
When the strike price in options does not have any intrinsic value left and is far from the current price, either upside or downside, it is called "out-of-the-money"
Understand Option Strike Price in Stock Market for call and put options: