Strike

DEFINITION of strike

The strike is also known as the strike price. This is one of the most important elements of options pricing. That means that an option has fixed price at which the owner of the option can buy, or sell the underlying security or commodity.

WHAT IT IS IN ESSENCE

It may be set by reference to the spot price of the underlying security or commodity on the day an option is taken out. Or it may be fixed at a discount or at a premium.

At the expiration date, the difference between the stock’s market price and the options this price represents the amount of profit that the option gains. 

In options trading, that means, the price at which a contract can be exercised. And the price at which the underlying asset will be bought or sold.

It is a key variable in a derivatives contract between two parties. Where the contract requires delivery of the underlying instrument, the trade will be at that price.

Regardless of the market price of the underlying instrument at that time.

If the option is a call, in the situation when the underlying asset hits this price it can be bought.

If the option is a put, then hitting the strike price means the underlying asset can be sold.

HOW TO USE

In order for the option to be exercised, the strike price must be reached before its expiration date. The more the asset price moves beyond the strike price, the more profit is taken from the option.

When the underlying asset in an option matches its strike price, the option is known as being at the money. When it exceeds this price, it is in the money.

Compared to the current market it is a key determining factor in the premium charged for an option. Other key factors are time to expiry and volatility of the underlying asset.