Strike Price — Concept Explainer Video

Transcript

One contract, two prices

The strike price is the contract price used when an option is exercised. The premium is what the option itself costs. Confusing these two numbers makes an inexpensive looking option seem much cheaper than its actual exposure.

Choosing a strike

With a stock at one hundred dollars, calls might be listed at ninety five, one hundred, and one hundred five. The lower strike gives a more favorable purchase right, so an otherwise identical call generally costs more.

The premium moves breakeven

Buy a one hundred dollar call for four dollars. The strike is one hundred, but the expiration breakeven is one hundred four before costs. Reaching the strike does not recover the premium. A put breakeven instead subtracts the premium.

The tradeoff is exposure

A farther out of the money option usually costs less, but needs a larger favorable move to have intrinsic value at expiration. Lower premium does not automatically mean better value. Compare the same expiration, multiplier, and option type.

Read the whole contract

Strike tells you where the exercise right sits. Premium tells you its cost. Expiration tells you how long it lasts. Read all three together, then include the multiplier and fees when converting a quote into real dollars.