Reviewed by Gotrade Internal Analyst
The strike price is one of the most important concepts in options trading, yet it is often misunderstood by beginners. Every options contract is built around a strike price, and this single number plays a central role in determining risk, payoff, and probability of profit.
Understanding what a strike price is helps investors move beyond treating options as directional bets. The strike price defines where the option becomes valuable, how much movement is required, and how the contract behaves as market conditions change.
Strike Price Meanings
In options trading, the strike price is the pre-agreed price at which the underlying asset can be bought or sold if the option is exercised.
- For a call option, the strike price is the price at which the buyer has the right to buy the underlying asset.
- For a put option, the strike price is the price at which the buyer has the right to sell the underlying asset.
The strike price does not change during the life of the contract. Once the option is created, this price is fixed, regardless of how the market moves.
The strike price defines the reference point for whether an option is profitable, worthless, or somewhere in between at expiration.
If you want to understand how strike prices affect option outcomes, watching how different strikes move as the stock price changes can make the concept much clearer.
How Strike Price Determines Option Moneyness
One of the most practical ways to understand strike price is through moneyness, which describes the option’s relationship to the current market price.
In-the-money (ITM)
- A call option is in the money when the stock price is above the strike price.
- A put option is in the money when the stock price is below the strike price.
In-the-money options have intrinsic value because exercising them would result in a profit before considering the premium paid.
At-the-money (ATM)
An option is at the money when the stock price is very close to the strike price.
At-the-money options have little or no intrinsic value, but they often carry significant time value.
Out-of-the-money (OTM)
- A call option is out of the money when the stock price is below the strike price.
- A put option is out of the money when the stock price is above the strike price.
Out-of-the-money options have no intrinsic value and rely entirely on future price movement.
Strike price selection directly determines whether an option is ITM, ATM, or OTM, which in turn affects risk and reward.
How Strike Price Affects Risk and Payoff
Strike price is not just a reference point. It actively shapes the risk profile of an options trade.
Lower strike prices for call options generally cost more but require less upward movement to become profitable. Higher strike prices are cheaper but require stronger price moves.
For put options, higher strike prices cost more but provide protection sooner. Lower strike prices are cheaper but only pay off after larger declines.
The strike price influences:
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Maximum potential payoff
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Probability of profit
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Sensitivity to price movement
Choosing a strike price is therefore a trade-off between cost, probability, and payoff size.
Strike Price and Option Pricing
Strike price plays a major role in determining an option’s premium.
- Options with strike prices closer to the current market price tend to be more expensive. This is because they have a higher probability of finishing in the money.
- Options with strike prices far away from the current price are cheaper because the likelihood of reaching that level before expiration is lower.
Volatility interacts with strike price. In high-volatility environments, even far-out strike prices can carry significant premiums because large price swings are more likely.
Strike price selection must be viewed in the context of volatility, time to expiration, and market expectations.
Understanding how different strike prices change probability and payoff can help you choose options that match your conviction level rather than chasing cheap premiums.
Strike Price vs Market Price
A frequent mistake in options trading is confusing the strike price with the current market price.
The market price changes continuously. The strike price does not.
An option does not become valuable simply because the market price touches the strike price. For buyers, profitability depends on how far the price moves beyond the strike price relative to the premium paid.
This distinction explains why options can lose money even when the stock moves in the expected direction.
How Traders Choose Strike Prices
Strike price selection depends on intent:
- Traders seeking higher probability outcomes often choose strikes closer to the current price. These options cost more but require smaller moves.
- Traders seeking higher leverage may choose farther strike prices. These options are cheaper but require stronger and faster price movement.
Investors using options for hedging typically choose strike prices that align with the level of protection they want rather than maximum profit.
There is no universally correct strike price. The “best” strike price depends on time horizon, volatility, and risk tolerance.
Conclusion
The strike price is the fixed price at which an option can be exercised. It defines where an option becomes valuable, how much movement is required, and how risk and reward are structured.
Understanding what strike price is and how it affects option behavior is essential for anyone learning options trading. Strike price selection is not about guessing outcomes, but about designing exposure intentionally.
FAQ
What is strike price in simple terms?
The strike price is the price at which an option can be bought or sold if exercised.
Does strike price change over time?
No. The strike price is fixed when the option is created.
Is a lower strike price always safer?
Not necessarily. It costs more and changes the risk-reward profile.
How do I choose the right strike price?
It depends on your strategy, time horizon, volatility, and risk tolerance.
References
- Corporate Finance Institute, How Investors Use Strike Price in Option Contracts, 2026.
- Investopedia, Understanding Option Strike Price, 2026.
