What is a Strike Price?

Every option you buy has its own Strike Price. To understand what a Strike Price is, you have to first understand what an Option is.

If you buy a Call Option you are buying the right to buy a certain stock at a certain price in the future (which is the Strike Price).

When trading Options you will have to decide which Strike Price to buy. You can do this many different ways.

If you see a stock trading at $35 and you believe it will go up to $43 you might want to buy the $40 Strike Price, this may get you the highest returns. It is also the riskiest. This trade is called the Out Of The Money or OTM.

This is a very risky trade. You could potentially lose your money on this trade if you are wrong, OR

You could buy a $30 Call which would be In The Money or ITM. This could help with a stop loss. If you set a stop at 50% of the price you bought the option at, it would protect your investment at the maximum loss of 50% of the money you invested.

Maybe you want to buy a $35 Call. This is an At The Money Option or an ATM. It could lead to higher returns than the ITM Call offering less returns than an OTM call.

Put options work differently. With a put option you are buying the right to sell a given stock at a given point in time at a given strike price.

So, in this case you would make money as the stock goes down instead of making money as the stock goes up.

With a put a price above the price of the stock is called an In the Money Option, since you can exercise it already and you have some profit already minus the price of the stock.

A Price below the option strike price would be Out of The Money, since there is no intrinsic value of the option unless the option goes down lower. And of course a price at the same price as the stock in At the Money.

If you want to learn how this works when buying options you can always read my guide here on How to buy stock options. It takes you though the basic terminologies when you buy an option so you don’t get lost and buy the wrong option.