In options contracts, which are derivatives, the holders have the right to buy or sell an underlying asset at a pre-determined price. This price is called the strike price or exercise price. One of the key aspects of an options contract is the strike price. In the case of call options, the strike price holder of the option can buy the security and input, and the holder can sell the security at the strike price.
Let us know more about strike prices and strike price intervals
What Is The Strike Price?
The strike price is the pre-fixed price at which the holder buys or sells the underlying assets or contracts. While trading options, the exchange offers many strike prices fixed at predefined intervals. This range depends on the underlying futures contract. Every option product has a unique price interval rule.
The same depends on the product structure and market needs. The products have different intervals and sometimes the intervals change according to the month of expiry. The entire strike price range for options depends on the past day’s futures contract settlement price. Check the same on Algo trading portal.
How Does It Work?
In the case of call options, if the strikes are lesser than the market price, it is called ITM or in-the-money. The holder can purchase the stock as the price is lower than the market and then chose to sell the same at a higher price. When the strikes are higher than the market or put with strikes are lesser than the market, are out-of-the-money or OTM.
So, we can say that the difference between the strike price and the security price decides whether the option is ITM or OTM. While ITM options have intrinsic value due to the lesser strike prices compared to the market price for a call, and higher compared to the market price for a put, ATMs have equal strike prices with current market prices.
Strike Price: Consequence
The strike prices in stock options trading are known to govern the ‘moneyness’ of the options contract, where moneyness means the strike price compared to the underlying stock price. This governs the price of every option and its trading objectives. In the case of a call option when the strike prices are higher than the stock price, then this out-of-the-money will have no value as the stock price is lesser than the call option prices permit you to purchase. But these call options are in the best position if you want the stock to move largely. When the Call options have low strike prices compared to the latest current stock price, then the money becomes more costly. Since there is intrinsic value but also responds heavily to small moves in the underlying stock.
It is also important to know about the implications of multiple strike prices. This allows the options traders to act specifically and ensure more rewarding as well as risky algo trading with SpeedBot. Various strike prices rise and drop the risk in the options. An options trader may start trading with the obvious options strategy through backtesting engine but may have a different risk appetite. In this case, they can select a different strike price and can look forward to attaining more reward or loss. The risk exposure variability in options trading is offered by multiple strike prices.
Strike Price Intervals
Intervals for strike prices depend on the type of underlying stock or asset and the current market price of the underlying option. In the case of lesser-priced stocks such as lesser than $25, the strike price intervals will be 2.5 points. In the case of a high-priced stock, the strike price intervals are 5 points to 10 points, when the stock is expensive and more than $200.
It is also important to know that the strike price interval depends on the fact that whether the option is an index option or a futures option and their points. If there are two option contracts in which one is the call option contract that has an $80 strike price and another call option that has a strike price of $100, and the current price of the asset is $90. While the call options are the same; the strike price differs. In the first contract, it is in-the-money which is worth $10 as the stock is more than $10 high compared to the strike price while the second contract is out-of-the-money again by $10.
Conclusion
The strike price allows you to know the price at which you can buy the underlying security in call or sell input. The difference between the strike price and the current market price is – ‘moneyness’. Use the strike price on options trading app to know the moneyness of the options contract and whether the option is ITM or OTM.
