The strike price of an options contract is the price at which an options contract holder can choose to buy or sell the underlying security on or before the expiration date when the option is exercised.
Hence, the strike price is also known as the exercise price.They mean the same thing.
There are only two possible outcomes for holders of option contracts. They either expire worthless or they are exercised when they are in the money.
If you look at the options chain for a company called Apollo Education Group, you will see that the call options are on the left side of the chain while the put options are on the right side of the chain.
The current price of Apollo Group Education is currently $7.53.
The portions which are shaded represent the in the money options while the portions that are unshaded are out of the money options. At the money options are options whose exercise prices are equal to the price of the underlying security.
If Apollo Group Education is trading at a price of $7, its November 2015 call option at a strike(exercise) price of $7 and its November 2015 put option at a strike(exercise) price of $7 are both consider at the money options. There is often a lot of trading activity surrounding at the money options because of its near term potential to become an in the money option where its value starts to increase at a faster rate with the underlying security.
The relationship between strike(exercise) price and call option price
Apollo Group Education. You will find that as the exercise price of the call options decrease, the premium call options premium actually increases. As the exercise price of the option increases, the option premium will decrease. To observe this, look at the “Ask” column and the “Strike” column. You look to the “Ask” Column as an indicative price to buying the option. When you want to sell the options, you would have to look to the “Bid” column.
The bid-ask spread represents the spread that market makers earn when trading.
Read : Wide Bid-Ask Spreads On Illiquid Optionable Stocks
The relationship between strike price and put option price
Now let us look at the put options of November 2015 options. As the exercise price increases, the put option premium increases. As the exercise price decreases, the put option premium decreases.
Intrinsic Value Of An Option
This leads us to the concept of intrinsic value. The intrinsic value of a call option is the difference between the price of the underlying security and the exercise price or strike price of an in the money call option. The intrinsic value of a put option is the difference between the strike price and the price of the underlying security for an in the money put option. Only in the money options have intrinsic value.
In an options chain as above, the intrinsic value of for in the money call options increase as the strike or exercise price decreases. On the other hand, the intrinsic value of in the money put options decrease as strike or exercise price decreases.
Strike price intervals for stock options
The strike(exercise) prices occurs in intervals depending on the stock price of the company.
Generally, the strike price interval is 2.5 points when the strike price is between $5 and $25. The strike price interval is 5 points when the strike price is between $25 and $200. The strike price interval is 10 points when the strike price is over $200.
This is general information regarding strike price intervals without taking into account stock splits and recapitalizations etc.
Read next :
When can an option be exercised?
Learn to read and understand options chain
Moneyness Of Options – The Relationship Between Exercise Price & Price Of Underlying Security