Understanding Strike Price: Definition, Function, and Impact

Key takeaways

• A strike (or exercise) price is the fixed price at which an option holder can buy (call) or sell (put) the underlying security.
• The relationship between strike and current market (spot) price—called moneyness—largely determines an option’s intrinsic value and premium.
• In-the-money (ITM) options have intrinsic value; out-of-the-money (OTM) options do not but may have time (extrinsic) value; at-the-money (ATM) options sit near the spot price and are typically most liquid.
• Option value depends on market price, strike price, time to expiration, volatility, interest rates, and dividends.
• Delta measures how much an option’s premium moves for a $1 change in the underlying and varies by moneyness.

What is a strike price?

A strike price (exercise price) is the predetermined price in an options contract at which the holder may buy (call) or sell (put) the underlying asset. It does not change over the life of the option. The difference between the strike and the current market (spot) price determines whether the option has intrinsic value.

How strike prices influence options trading

Options are listed with a range of strike prices above and below the current market price. The chosen strike determines the likelihood an option will finish profitably and therefore affects its premium:

• A call with a strike above the spot price is OTM; below the spot price is ITM.
• A put with a strike above the spot price is ITM; below the spot price is OTM.
• If the underlying never reaches an option’s strike by expiration, the option may expire worthless.

Example: if a stock trades at $100, a $110 call gives the right to buy at $110. If the stock stays below $110 through expiry, that call expires worthless. If it rises above $110, the excess is intrinsic value.

Strike prices vs. market (spot) prices and option premium

The option premium (price) reflects intrinsic value plus extrinsic (time and volatility) value. As the strike moves relative to the spot price:

• Closer strikes (especially ITM or ATM) generally command higher premiums because the probability of finishing ITM is greater.
• Far OTM strikes have lower premiums but offer higher leverage if they become profitable.

Moneyness: ITM, OTM, ATM

• In-the-money (ITM)
• Call: spot > strike (has intrinsic value)
• Put: spot < strike (has intrinsic value)
• Out-of-the-money (OTM)
• Call: spot < strike (no intrinsic value)
• Put: spot > strike (no intrinsic value)
• At-the-money (ATM)
• Strike ≈ spot; often highest trading activity/liquidity

OTM options lack intrinsic value but may retain extrinsic value driven by time remaining and implied volatility.

Delta: how strike affects sensitivity

Delta estimates how much an option’s price will change for a $1 move in the underlying:
* ATM calls ≈ +0.50; ATM puts ≈ −0.50.
* ITM calls have deltas > 0.50 (moving toward +1.00 as they deepen ITM).
* ITM puts have deltas < −0.50 (moving toward −1.00).
* Deep ITM options behave more like the underlying; deep OTM options have deltas near zero.

Key factors that determine an option’s value

Pricing models (e.g., Black‑Scholes, binomial) use the same core inputs:
* Current market (spot) price
* Strike price
* Time to expiration
* Implied volatility
* Interest rates
* Dividends (if applicable)

More time to expiration and higher volatility increase the chance of finishing ITM and therefore raise premiums.

Examples

Call options (stock at $145):
* $100 strike call: ITM by $45 at expiration (intrinsic value = $45).
* $150 strike call: OTM by $5 at expiration (would expire worthless if spot ≤ $150).

Put options (stock at $45):
* $50 strike put: ITM by $5 at expiration (intrinsic = $5).
* $40 strike put: OTM at expiration if spot = $45 (no intrinsic value).

Choosing strike prices

Desirability depends on goals and risk tolerance:
* Near‑the‑money strikes: higher probability of exercise, higher premiums.
* Far OTM strikes: lower cost, higher leverage/lottery‑ticket potential, lower probability of finishing ITM.
Traders select strikes to balance cost, probability, and desired payoff profile.

Strike vs. exercise price; strike intervals

• “Strike price” and “exercise price” are synonymous.
• Listed options have standardized strike intervals set by exchanges (and the OCC). Typical spacing:
• Wider spacing for higher-priced or less liquid stocks.
• Common guideline examples: $2.50 increments for strikes under $25, $5 increments for $25–$200, and $10 increments above $200—though exchanges may vary and add strikes on request.

Strike price vs. spot price

• Strike price: the contract price at which the asset can be bought or sold if exercised.
• Spot price: the current market price of the underlying.
  Their relationship defines moneyness and largely determines an option’s intrinsic value and premium.

Conclusion

The strike price is a central determinant of an option’s value and risk/reward profile. Understanding how strikes relate to spot prices, time, volatility, and delta helps traders select options that match their objectives—whether conservative hedging or speculative leverage.