What is the price of the strike?

Definition and Examples of Strike Price

The strike price is the price in a binary options process at which the underlying stocks (or other assets) can be bought or sold. For call options, this is the price at which the underlying stock can be purchased, and for put options, this is the price at which it can be sold.

Options are financial contracts that grant the buyer the right, but not the obligation, to buy or sell the underlying stock at the strike price during the option period. An option that gives the right to buy is called a call option, and an option that gives the right to sell is called a put option.

Suppose Netflix (NFLX) shares were trading at $682 per share in 2022, and the trader believes the price will rise over the next four months. Therefore, they purchased a call option with a strike price of $680 for $53 per contract.

Here is what this option will be called: Netflix option dated March 22, $680 at $53.00. Note that the strike price of $680 is included in the name of the option.

The option gives them the right to purchase the stock at $680 per share. Since they paid $53 for the option, the stock price must be above $733 for the trade to be profitable.

Suppose the stock price rises to $750, and the trader exercises the option and sells the shares. They buy the shares at $680 and sell them at $750, making a profit of $70 per share. After deducting the option price of $53, the trader realizes a return of $17 per share.

How the Strike Price Works

Strike prices are generally set at intervals of $2.50 between $5 and $25, $5 between $25 and $200, and $10 thereafter.

There can be fewer strike prices or strike prices that do not have much liquidity. This can occur for strike prices that differ significantly from the current price of the underlying stock or for stocks that generally have low trading volumes.

The strike price is one of the important elements in determining the “intrinsic value” of the option and the various values that make up the price. Options are considered “in the money” if exercising the option would yield a positive return now (for example, a call option with a strike price of $50 and an underlying stock price of $55).

Options are “in the money” if the strike price equals the stock price ($50 for the underlying price and strike price), and they are “out of the money” if exercising the option would not yield a return (the underlying stock price is below the sum of the strike price).

For options that are “in the money,” the value the trader will gain from exercising the option is called intrinsic value. In the example above, the intrinsic value is $5, calculated as the underlying stock price of $55 minus the strike price of $50. The trader buys the stock at $50 and sells it at $55.

“In the money” options are not traded at just their intrinsic value, and “out of the money” options still have value even if they do not have intrinsic value. This is referred to as time value or implied volatility of the option. Options have time value because it’s possible for intrinsic value to increase before the option expires. Traders who buy the option are betting it will increase more than the time value.

In the above Netflix example, the option has an intrinsic value of $2 and a time value of $51. It is partly due to the high time value because of the option’s duration (four months) and partly because the stock is considered volatile.

The strike price is important for calculating the tax due on employee stock options. Employees who receive stock options granted as part of an incentive option plan do not pay tax when the option is received or exercised. However, when the shares purchased using the option are sold, the strike price of the option is considered the cost basis used to calculate the taxes owed.

Notes

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– The strike price is the price at which a trader can buy or sell shares based on exercising an option.

– The strike price is important information for calculating the value of money and taxes on employee stock options.

– Options are considered “in the money” if the price of the underlying security is equal to the strike price.

Source: https://www.thebalancemoney.com/what-is-strike-price-5223978