Lesson 4: What is the strike price?

Strike Price

Strike prices are fixed in the option contract. For call options, the option holder has the right to purchase the underlying stock at that strike price up to the expiration date. For put options, the strike price is the price at which the underlying stock can be sold. 

For example, an investor purchases a call option contract on shares of ABC Company at a $5 strike price. Over the life of the option contract, the holder has the right to exercise the option and purchase 100 shares of ABC for $500. If the price of ABC shares rises to $10, the option holder can lock in a $500 profit by exercising the option because it allows him to buy shares at $5 and sell them for $10 in the open market.

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Why Strike Prices Matter?

The strike price is one of the most important elements of options pricing. At the expiration date, the difference between the stock's market price and the option's strike price represents the amount of profit gained by exercising the option.   

How Does Market Price Work?

In the broadest sense, an item's market price lies at the point of intersection between the available supply of the good or service and market demand for it. Any shift in the supply or demand affects an item's market price. If demand is held constant, a decline in supply results in a rise in its market price and vice versa. Likewise, if supply is held constant, a rise in the demand for an item results in a rise in its market price and vice versa.

In this Chapter, you will learn about what strike prices are and how important they are when picking a contract. The strike price is the price that the underlying asset can be purchased at if the option contract is exercised before expiration. The strike price is the price from which you can get long or short the underlying security from. Here is a video by Sky View Trading to help you understand what a strike price is.

 

https://youtu.be/MiybniIIvx0

Option Prices

Still don't understand, check out this next video by Tasty Trades

 

https://youtu.be/PM08yjp1WHQ

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