Strike price
What is Strike price?
The strike price is the contractual price used to determine an option's exercise transaction or cash-settlement payoff.
Strike selection changes both economics and risk concentration. Investors should compare several strikes using payoff tables, delta, gamma, implied volatility, spread, and expected transaction cost rather than selecting from nominal affordability. For multi-leg strategies, strike relationships determine maximum gain, loss, and path behavior, and a small order-entry error can create an entirely different exposure.
Role in option payoff
For a standard call, intrinsic value increases when underlying price exceeds strike. For a standard put, it increases when underlying price falls below strike. Strike defines contractual moneyness together with the underlying price, but moneyness alone does not determine profit because premium, costs, time, volatility, financing, and dividends also matter.
Example
A $90 call on a stock at $100 is in the money by $10, while a $110 call is out of the money. The $90 call can still produce a loss if purchased for more than its eventual payoff. A stock split can adjust both strike and deliverable, so an old contract may no longer represent 100 standard shares.
Choosing a strike
Different strikes trade off premium, delta, probability, leverage, and payoff. A lower-strike call costs more but behaves more like the underlying; a farther out-of-the-money call costs less and has a lower probability of meaningful payoff. For hedges, strike determines retained loss before protection and should connect to the investor's actual risk tolerance.
Volatility surface
Options at different strikes commonly have different implied volatilities, producing skew or smile. Comparing dollar premiums without controlling for strike and maturity is misleading. Liquidity can also cluster near standard intervals. Models interpolate between listed strikes, introducing uncertainty for complex books and for contracts whose underlying can jump or become hard to hedge.
Practical checklist
Confirm strike currency, decimal, adjustment history, underlying, multiplier, expiration, and deliverable. Calculate intrinsic value and expiration break-even separately. Review liquidity and implied volatility across neighboring strikes, model exercise and assignment, and align a hedge strike with the protected position. Never call an option cheap merely because its strike is distant or its premium is a small dollar amount.
Also known as: exercise price
Sources and further reading
- Investor Bulletin: An Introduction to Options, Investor.gov, U.S. Securities and Exchange Commission