The strike price is one of the key factors in determining the value of an option.
If you are new to options trading or a seasoned veteran, it is important to understand the impact that a strike price has on your profit.
David Jaffee of BestStockStrategy.com has taught more than 1,500 students how to profitably trade options, and his teachings include teaching students to choose the right strike price.
Keep reading to learn more about options strike price.
What is an options strike price?
The strike price of an option is the price at which you can buy or sell the underlying stock.
Both Call and put options can be bought and sold at a specified strike price.
Strike price may also be referred to as the exercise price because it is the set price that you can buy or sell at when exercising a derivative contract.
The strike price of a call or put option is established when a contract is written, and it is one o the determining factors of the option price.
The strike price is also the price that determines whether an option is in-the-money, or out-of-the-money.
Strike prices for options are set at fixed dollar amounts and usually are available in $2.50, $5 or $10 increments.
Choosing a good strike price can help you become a profitable trader.
In fact, the strike price of an option is considered one of the most important factors in determining an option’s value.
The value of an option is determined by the difference between the stock price and the strike price, the duration of the options, the market volatility, the implied volatility of the underlying security, etc.
When buying a call option, if the underlying stock price is below the strike price, the option does not have intrinsic value.
When the underlying stock price I above the strike price, the option has intrinsic value (when long a call option).
However, as stated previously, the value of an option can change based on volatility and days to expiration.
Options Strike Price Example
Consider a situation where you're long a put option with a strike price of $50 that is about to expire.
If the underlying stock is currently trading at $45, the put option has a value of $5 of intrinsic premium.
However, if the value of the underlying stock is currently trading at $55, the put option has no intrinsic value.
Strike Price vs. Stock Price
The stock price of an option is the last transaction price for a share of the underlying asset.
The strike price of an option is the price at which a contract can be executed by the option’s owner.
How to Choose Strike Price for Call Options
Choosing the strike price and the time to expiration are important decisions when selecting an option.
The strike price can greatly impact the value of an option and affect your profit.
In general, I believe that selling out-of-the-money options is the best trading strategy.
To earn a consistent profit by trading options it is important to mitigate your risk.
In my opinion, selling put options is the best and safest options trading strategy to earn a profit.
When choosing a strike price you must consider your risk tolerance and your preferred risk-reward payoff.
Strike Price and Spot Price
Spot price refers to the current market price of an option.
The owner of an option has the right, but not the obligation, to exercise their option at the specified strike price.
Is there a strike price formula?
There is not a magic strike price formula to calculate the perfect strike price.
Some options traders prefer to use Greeks as a tool to determine an optimal strike price.
Greeks can help measure how various factors will impact the price of an option. The mathematical calculations consider volatility, time to expiration, and a few other factors.
For example, Delta can help predict the probability of an option being in-the-money when it expires.
While Greeks can be helpful, they are not a guarantee for success.
There are also various probability and strike price calculators available online that do the math for you, but these are also not guarantees to earn a profit.
Learn More About Options Strike Prices with David Jaffee
David Jaffee of BestStockStrategy.com can teach you the best strategy for trading options profitability.
Choosing the right strike price is a skill that comes with time and experience.
By limiting his watch list of stocks, David Jaffee is able to learn the ebbs and flows of each stock and determine the best strike prices.
Enroll in David Jaffee’s online options trading course today to improve your ability to choose the right strike price.