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Strike price

The strike price, sometimes called the exercise price, is the price at which a buyer of an option contract, either a call or a put, will purchase or sell shares of the underlying security if he or she chooses to exercise the option.

Contents

Expanded definition

Remember, an option gives the owner the right, but not the obligation, to buy something from the owner at an agreed upon price. This agreed upon price is the strike or exercise price. At the time of purchasing the option, this price is set.

An example

In the following table, various call options that were available for Apple back in 2007 are listed. The strike prices for each have been highlighted. Note that as the strike price increases, the purchase price (the "ask") decreases as the strike price increases.

Strike Price Symbol Last Price Bid Ask Open Interest
July 2007 Expiry
$85 QAAGQ $11.80 $11.60 $11.70 18,752
$90 QAAGR $8.70 $8.60 $8.70 16,789
$95 QAAGS $6.30 $6.20 $6.30 21,861
October 2007 Expiry
$85 QAAJQ $14.30 $14.30 $14.50 881
$90 QAAJR $11.30 $11.50 $11.70 2,237
$95 QAAJS $9.40 $9.10 $9.30 1,579

You'll have noticed something else, too. The strike prices vary by a set dollar amount. Normally, for stocks trading under $25 per share, the steps will be $2.50. For stocks trading above $25, the increments are $5. For those trading above $200, steps of $10 or larger are acceptable.

Note that the strike price to be paid per share in the contract and the contract is for 100 shares. So what is actually paid is $9,000 if you exercise the $90 call option QAAJR.

In or out of the money

An option is said to be "in the money" if the strike price is below (for a call) or above (for a put) the current trading price of the underlying security. In the opposite situation, the option is said to be "out of the money." Those that are in the money could be exercised by the holder if the person wants to buy or sell the stock, while when it is out of the money it would not make sense to exercise it.

However, don't get too complacent if you are involved in an option contract that is out of the money, as people do weird things.

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