Definition: A strike price is the agreed upon stock price at which the holder of the option is able to buy (for call options) or sell (for put options) when the option is exercised. Of course, the option can only be exercised by the holder if it is ITM.
Strike prices have an effect on option value (premium). The strike price determines the moneyness of the option.
When options are ITM (In-the-money), the difference between the strike price and current trading price of the stock represents the profit per share when exercised.
Options that are OTM (Out-of-the-money), only get value based on the time value that is determined based on days until expiration. If options expire, the buyer’s max loss is the premium paid to acquire the option(s).
Call Option Premiums Based on Different Strike Prices
- Calls are ITM when the strike price < market price.
- Calls are OTM when the strike price > market price.
Put Option Premiums Based on Different Strike Prices
- Puts are ITM when the strike price > market price.
- Puts are OTM when the strike price < market price.