If you’re coming from the world of stock trading, or even cryptocurrencies, the idea of a ‘Strike Price’ is probably foreign to you. Unlike buying or selling stocks, you’re able to get long or short the underlying security from a certain price, the strike price. Whether the strike price is above or below the current trading price will determine the value and cost of the option. In this article, we’ll breakdown everything you need to know to choose the best options to trade.
What is a strike price?
The strike price is the price that the underlying asset can be purchased at if the option contract is exercised before expiration. The strike price is the price from which you can get long or short the underlying security from. You’ll choose the strike price at the time of purchase or when the option contract is written.
Which strike you choose and the price of the underlying asset at the time of purchase will determine if your strike is considered In-The-Money (ITM), At-The-Money (ATM) or Out-Of-The-Money (OTM).
What Are In-The-Money Options Strike Prices (ITM)?
Options Contracts that are ITM have intrinsic value and less extrinsic value (or premium). An ITM Call Option’s strike price would be below the current market price of the underlying security. With an ITM Put Option, the strike price would be above the current market price of the underlying security.
Example: Buying ITM Call Options On AMZN
In this example, we’re buying Calls to benefit from upward price movement in the stock.In the image of AMZN, you’ll see the strikes within the green box are all considered In-The-Money (ITM). This is because the strike price is below the current market price.
Example: Buying ITM Put Options On AMZN
In this example, we’re buying Puts to benefit from downward price movement in the stock. Looking at the image below of AMZN, you’ll see the strikes within the green box are all considered In-The-Money (ITM). This is because the strike price is above the current market price.
What Is The At-The-Money Options Strike Price (ATM)?
An ATM option will have little to no intrinsic value and the value of the option will nearly be entirely premium (extrinsic value). A strike will be ATM if trading at the current market price of the stock.
What Are Out-Of-The-Money Options Strike Prices (OTM)?
An OTM option has no intrinsic value and is completely comprised of premium (extrinsic value). An OTM Call Option’s strike price would be above the current market price of the underlying security. With an OTM Put Option, the strike price would be below the current market price of the underlying security.
Example: Buying OTM Call Options On AMZN
In this example, we’re buying OTM Calls to benefit from upward price movement in the stock. Looking at an image of the different strike prices below available for AMZN, you’ll see the strikes within the red box are all considered Out-Of-The-Money (OTM), because the strike price is above the current market price. Also, note that all of the option’s value is extrinsic value.
Example: Buying OTM Put Options On AMZN
In this example, we’re buying OTM Puts to benefit from downward price movement in the stock. In the image below of AMZN, you’ll see the strikes within the red box are all considered Out-Of-The-Money (OTM). This is because the strike price is below the current market price. Also, note that all of the option’s value is extrinsic value.
Option Strike Price Intervals
Depending on the market price and expiration will determine the strike prices available to you. With a larger stock like Amazon (AMZN), which is currently trading at $1821/share you’ll have larger point gaps in the strike increments. Take a look at the image below:
As you can see, AMZN’s strike prices are in 2.5 point increments.
A stock with a much smaller market price, like Advanced Micro Devices (AMD), which is currently trading at $31.52/share, has strikes in half-point increments as shown below:
It’s also important to realize that different expirations can offer different strike prices to trade as well. As you can see from the image below, the AUG 30 SPY expiration series offers a 292.5 strike price (yellow box). If you look at the SEP 4 expiration series, you’ll see there are only whole number strikes available (purple box).
If you’re new to options, a few key takeaways would be first, to understand that the strike price is the price you’ve decided to get long or short the stock (whether buying or selling). Second, as you saw with the different expirations, different strike prices will give you lots of flexibility on how to trade the underlying asset. Lastly, it’s important when deciding which options to use, to keep in mind if they’re ITM, ATM, or OTM as they all have different values and probabilities.