When I started my journey in the stock market a decade back, then I was unsure which things you should analyze before narrowing down your buying priorities. Over the course of time, I learned a lot many things which were never taught in the classroom. Guess that comes with time & experience. But when I’m here then you need to worry friends I’m here to make your journey a little easier which was not so possible a decade back. Today we will discuss What is the Strike Price of an Option.
What is the Strike Price of an Option with an Example?
The strike price is a common term in the derivatives market, and it is important for all investors to understand what it means. The strike price is the price at which the derivative contract will trade on a predetermined date in the future. Call and put options are the two main types of options contracts. The strike price of call options refers to the cost of purchasing the asset. In the case of put options, the strike price is the cost of selling the asset.
Assume an investor purchases a call option on a stock that is trading at Rs. 250 and has a strike price of Rs. 220. This implies that the seller believes the stock price will fall in the future and wants to sell at a strike price of Rs. 220 to avoid major losses.
Another investor, on the other hand, conducted a stock analysis and believes that the stock price will rise in the near future. He believes the stock price will rise to Rs. 300. The seller’s strike price will be the price at which the stock will be sold on the contract’s expiration date.
So, if the market goes up and the stock price becomes Rs. 270 then the buyer will yield profit as he buys the stock at a lesser price according to the contract which is Rs. 220.
Similarly, if the stock price goes down up to Rs. 200 then the seller makes a profit by selling at the strike price of Rs. 220.