Strike Price
Candlefocus EditorA call option's strike price is the price at which the underlying stock can be bought, assuming the investor exercises the option. The strike price must be lower than the stock price for the option to be profitable. For those who believe that the security price is going to go up, buying a call option at a lower strike price will benefit more if they were to exercise their option as they'll be buying at a lower price.
On the other hand, a put option's strike price is the price at which the underlying stock can be sold, assuming the investor exercises the option. The strike price must be higher than the stock price for the option to be profitable. For those who believe that the security price is going to go down, buying a put option at a higher strike prices will benefit more if they were to exercise their option as they will be selling at a higher price.
The main benefit of strike price when it comes to options trading is that it allows investors to take less of a risk while potentially making a larger profit. The ability to independently choose the strike price, combined with the variable expiration date and the ability to trade in a rapidly changing market, adds power to the investor's ability to control the financial risk associated with options trading.
Choosing the right strike price is key to successful options trading, and investors should be aware of the potential factors such as the direction of the market when deciding the best strike price to use. While it’s important to be aware of the current market price, investors should take into account their own risk tolerance and expectations of the underlying security when choosing their strike price.