What is the Strike Price in Options Trading?
The most important number in any options contract: how strike price determines your risk, reward, and probability of success.
Quick Summary
The strike price is the fixed price at which you can buy (call) or sell (put) the underlying stock. It determines whether your option is In The Money (has value), At The Money (strike = stock price), or Out of The Money (no intrinsic value). Lower strikes cost more for calls; higher strikes cost more for puts.
When you look at an options chain for a stock like Apple or Tesla, you'll see dozens of different contracts listed for the same expiration date. Some are expensive, some are cheap, and some cost almost nothing.
Why is there such a difference in price? The answer lies in the Strike Price.
The Strike Price is the "anchor" of every options contract. It's the single most important number you select when entering a trade, as it defines your risk, your potential reward, and your probability of success.
The Definition: What is a Strike Price?
The Strike Price is the specific, pre-agreed price at which the underlying stock can be bought (in the case of a Call) or sold (in the case of a Put) when the option is exercised.
It is the "target" price of the contract.
For Call Buyers
The strike price is the price you get to pay for the stock. You want the stock price to rise above your strike so you can buy low.
For Put Buyers
The strike price is the price you get to sell the stock for. You want the stock price to fall below your strike so you can sell high.
Understanding "Moneyness" (ITM, ATM, OTM)
To understand which Strike Price to choose, you need to understand the relationship between the Strike Price and the current Stock Price. This relationship is called "Moneyness."
There are three states an option can be in:
In The Money (ITM)
The option has intrinsic value. If exercised now, it would be worth something.
- Call: Stock > Strike
- Put: Stock < Strike
At The Money (ATM)
Strike price equals (or is very close to) the current stock price.
- Most sensitive to price changes
- Highest time value
Out of The Money (OTM)
The option has zero intrinsic value. If it expired today, it would be worthless.
- Call: Stock < Strike
- Put: Stock > Strike
Example: Stock Trading at $100
| Strike Price | Call Option Status | Put Option Status |
|---|---|---|
| $90 | ITM (+$10 intrinsic) | OTM |
| $100 | ATM | ATM |
| $110 | OTM | ITM (+$10 intrinsic) |
How Strike Price Affects the Premium (Cost)
Beginners often ask: "Why shouldn't I just buy the cheapest option available?"
The price of the option (the Premium) is directly linked to the Strike Price:
Low Strike (Deep ITM): Expensive. Already has real value. Behaves similarly to owning the actual stock.
High Strike (Deep OTM): Cheap. The stock has to make a massive move to reach that price. Lower probability of profit.
High Strike (Deep ITM): Expensive. Gives you the right to sell well above the current market.
Low Strike (Deep OTM): Cheap. The stock has to crash significantly for these to become valuable.
Call Option Premium vs Strike Price (Stock at $100)
Which Strike Price Should You Choose?
Selecting a strike price is a balancing act between Probability and Potential Reward.
| Approach | Strike Selection | Characteristics | Risk/Reward |
|---|---|---|---|
| Conservative | ITM (In The Money) | Higher cost, higher probability of profit | Lower risk, lower % return |
| Balanced | ATM (At The Money) | Moderate cost, balanced risk/reward | Moderate risk, moderate return |
| Aggressive | OTM (Out of The Money) | Low cost, lower probability of profit | Higher risk, higher % return potential |
Important Reality Check
While OTM options can theoretically produce large percentage gains, most OTM options expire worthless. The stock needs to move significantly just for you to break even. Buying the cheapest option available is often a losing strategy over time. Be realistic about how far and how fast a stock might move.
Factors to Consider When Choosing a Strike
Your Price Target
Where do you realistically expect the stock to go? Your strike should make sense relative to that target. If you expect a stock at $100 to reach $110, a $150 strike call has very low probability of profit.
Time Until Expiration
More time = more opportunity for the stock to move. Longer-dated options can justify slightly more aggressive strikes. Short-dated options (especially weeklies) often require ITM or ATM strikes to have reasonable probability.
Risk Tolerance
How much are you willing to lose? ITM options cost more but preserve capital better if wrong. OTM options are cheaper but more likely to result in 100% loss of premium.
Premium Budget
ITM options require more capital upfront. If you have a smaller account, you may be forced into ATM or OTM strikes—but understand the trade-off in probability you're making.
Frequently Asked Questions
Summary
The Strike Price is the line in the sand. It determines whether your option finishes with value or expires worthless.
When trading options, you aren't just betting on the direction of the stock—you're betting on how far it will go. Choosing the right strike price is about being realistic with your price targets rather than just picking the cheapest contract on the board.
Remember: Cheap options are cheap for a reason. The market is pricing in the low probability that they'll ever be worth anything.
