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What is an Option's Strike Price?

All options represent the right the buy (for call owners) or sell (for
put owners) 100 shares of stock at a certain price, on or before the
option's expiration date. Traders who are short options have an
obligation to sell (for call sellers) or buy (for put sellers) 100 shares
of stock at a specified price if assigned to an exercise notice.

An option's strike price indicates the purchase/sale price of 100

shares of stock (per option contract) in the event that the option
buyer exercises, or the option expires in-the-money.

Let's take a look at what a real option chain looks like and go
through some examples of what the strike prices represent:

Stock Price at $120

Call Price Strike Price Put Price
$12.07 110 $1.91
$5.90 120 $5.74
$2.36 130 $12.20

As you can see, there are numerous strike prices for every call and
As you can see, there are numerous strike prices for every call and
put. The following table summarizes what each of these strike
prices represents for option buyers (assuming one option contract):

Strike Pric Call Buyer's Right Upon Ex Put Buyer's Right Upon Ex
e ercising: ercising:
Buy 100 shares for $110 pe Sell 100 shares for $110 per
110
r share. share.
Buy 100 shares for $120 pe Sell 100 shares for $120 pe
120
r share. r share.
Buy 100 shares for $130 pe Sell 100 shares for $130 pe
130
r share. r share.

Conversely, the following table summarizes the obligations for call

and put sellers at each strike price (assuming one option contract):

Strike Pric Call Seller's Obligation if A Put Seller's Obligation if As

e ssigned: signed:
Sell 100 shares for $110 per Buy 100 shares for $110 pe
110
share. r share.
Sell 100 shares for $120 pe Buy 100 shares for $120 pe
120
r share. r share.
Sell 100 shares for $130 pe Buy 100 shares for $130 pe
130
r share. r share.

So, at this point you understand that an option's strike indicates the
price at which shares of stock will be bought or sold when an option
is exercised. Regarding basics, this is all you really need to know
about an option's strike price. However, you should also know how
an option's premium relates to its strike, which we'll discuss in the
next section.

Now that you know the basics of an option's strike price, let's
di h ti ' t ik i l t t th ti '
discuss how an option's strike price relates to the option's
premium.

Strike Price vs. Stock Price: In-the-Money, At-

the-Money, and Out-of-the-Money Options.

Aside from representing the purchase or sale price when exercising

an option, the relationship between an option's strike price and the
current stock price can help explain the price of the option.

More broadly, there are three terms that options traders o en use
to describe the relationship between an option's strike price and
the current stock price (which indicates whether an option's price is
likely to be expensive or cheap). The three terms are "in-the-money
(ITM),"  "at-the-money (ATM)," and "out-of-the-money (OTM)."
(https://www.projectoption.com/option-moneyness-explained/)
Here's how each of these phrases describes the relationship
between the stock price and an option's strike price:

In-the-money: Calls with strikes below the stock price; puts with

strikes above the stock price.

At-the-money: Calls and puts with strikes equal to or near the stock

price.

Out-of-the-money: Calls with strikes above the stock price; puts

with strikes below the stock price.

As an example of what this looks like, let's examine the same option

chain from the previous section:
 Stock Price at $120
ITM/ATM/OT ITM/ATM/OT
Option Type Strike Price Option Type
M M
ITM 110 OTM
ATM Call 120 Put ATM
OTM 130 ITM

As you can see, with the stock price at $120, both the $120 call and
put are considered to be at-the-money, the 110 call and 130 put are
both in-the-money, and the 110 put and 130 call are out-of-the-
money.

Next, we'll talk about how a call or put option's strike price relates
to the option's price.

Call Option Strike Price vs. Premium

In the previous option chain tables, you may have noticed that at
lower strike prices, call prices are higher. Conversely, call prices are
lower at higher strike prices. Why is this? Intuitively, call options
with strike prices lower than the stock price should be more
expensive because the ability to buy shares of stock for less than
the current share price is valuable. On the other hand, call options
with strike prices higher than the stock price should be cheap
because there is no "real" value in being able to buy shares for
more than the current share price.

Consequently, in-the-money call options will be the most expensive

(more expensive at lower strikes), and out-of-the-money call
(more expensive at lower strikes), and out of the money call
options will be the cheapest (closer to $0 at higher strikes). The
following visual validates this concept using 70-day options on the
S&P 500 ETF (SPY):

Next, we'll examine the relationship between put option prices and
their strike prices.

Put Option Strike Price vs. Premium

With a put option the relationship between the strike price and
With a put option, the relationship between the strike price and
premium is the opposite of calls: at higher strike prices, put options
are more expensive; at lower strike prices, put options are cheaper.

The direct relationship between a put's strike price and premium

should make sense because the right to sell shares of stock for
more than the current share price should be valuable. Conversely,
the ability to sell shares of stock for less than the current share
price doesn't have any "real" value, which explains why put options
with strike prices below the stock price are 100% extrinsic/time
value.

Like with calls, in-the-money puts will be the most expensive while
out-of-the-money puts will be the cheapest (closer to $0 at lower
strike prices). The following visual validates this concept using 70-
day option prices on SPY:
Very nice! You should now have a solid handle on how strike prices
relate to calls and puts, as well as how the relationship between an
option's strike price and the stock price can be an indication of the
option's value (and why that relationship makes sense).

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