Beginner’s Strike Price Trading Guide
Due to its various terminology and concepts, financial market trading might confuse beginners. A typical option trading term is strike price. The strike price and trading relevance will be explained in this post.
The strike price?
Options trading entails purchasing or selling an underlying asset at the strike price (exercise price). Options contracts let traders buy or sell an asset at a defined price and time.
Put vs. Call
Know the difference between call and put options to comprehend strike pricing. Call options let the holder buy the asset, while put options let them sell it. The options have strike prices.
Job of Strike Price
Strike price determines options contract profitability and appeal. The options contract execution price and underlying asset market price are important.
Call options are favorable when the strike price is below the asset’s market price. Put options require a higher strike price than market price to keep value.
In-the-money, at-the-money, and out-of-the-money options
Options contracts have three varieties based on the strike price and asset market price:
When strike price exceeds market price, option is in-the-money. Call options strike below the market price, while put options strike above. Value lies in in-the-money options.
ATM: At-the-money options have matching strike and market prices. At-the-money options have higher premiums because they may become in-the-money.
The option is out-of-the-money when the strike price is below market. Out-of-the-money call and put options have strike values above or below market price. Out-of-the-money choices are useless.
Influential Factors
Options strike prices vary on numerous factors:
Market Outlook: Traders predict asset price growth or depreciation.
Time till expiration: Option traders set a strike price depending on remaining time.
Volatility: Asset volatility affects strike price. Volatile traders may establish a striking price besides the market price.
Profit Target: Traders consider profit goals and risk tolerance while setting a striking price.
Options contract premiums vary by striking price, which traders consider when making decisions.
Conclusion
Learners in options trading must comprehend strike prices. Trading successfully involves knowledge of strike price, market price, and options type (call or put). Using several factors, traders may determine the strike price depending on market expectations and risk tolerance.
Sources and References:
1. https://www.investopedia.com/terms/s/strikeprice.asp
2. https://www.optionsplaybook.com/options-introduction/in-the-money-at-the-money-and-out-of-the-money-options/
3. https://www.fidelity.com/learning-center/investment-products/options/options-trading-strategies/understanding-options