Financial Glossary
Strike Price
The agreed-upon price: how strike selection determines profit and risk in options.
What is Strike Price?
The strike price is the fixed price at which an option can be exercised. A call option with a $100 strike gives the right to buy at $100 (regardless of current market price). A put option with a $100 strike gives the right to sell at $100. Options are available at many strikes: if a stock is $100, you might trade $95, $100, $105, $110 calls and puts.
Strike selection is crucial: deep out-of-the-money calls ($150 strike on a $100 stock) are cheap but unlikely to profit. At-the-money calls ($100 strike) cost more but have higher probability of finishing in-the-money. Deep in-the-money calls ($50 strike) cost most but act almost like owning stock. There's no universally 'best' strike—it depends on your outlook, risk tolerance, and capital availability.
Strike Selection Strategy
Aggressive traders buy far out-of-the-money (OTM) options for leverage with limited risk. Conservative traders buy near or in-the-money (ITM) options for higher probability but higher cost. Selling premium? You collect more from out-of-the-money options (higher probability of expiring worthless) but less money. Selling in-the-money options collects more premium but creates higher assignment risk.
The relationship between current price and strike determines moneyness (in-the-money, at-the-money, or out-of-the-money), which directly affects both option price and probability of profit.
Disclaimer: Strike selection affects risk-reward significantly. Deep out-of-the-money options frequently expire worthless. Deep in-the-money options behave like stock and are not suitable for pure leverage plays. Before trading options, consult a qualified financial advisor. Options involve substantial risk.