Strike Price in Options - What It Means and How It Works

If you’re just starting out with options, the strike price in options is one of the first things you’ll need to understand. What is a strike price in options? Why does it affect how much you pay or earn? And how do you choose the right one for your trade?

Key Takeaways

• The strike price in options is the set price at which you can buy (call) or sell (put) the underlying asset in the future.
• It’s a key part of the contract and helps determine whether the option has intrinsic value.
• Options are classified as in-the-money, at-the-money, or out-of-the-money based on how the strike price compares to the market price.
• In-the-money options offer immediate value, while out-of-the-money ones are cheaper but require the market to move in your favor to become profitable.

What is a strike price in options

The strike price in options is the price you agree to buy or sell the stock for if the option is used. For a call option, it’s the price you’d pay to buy the shares. For a put option, it’s the price you’d get if you sell them.

This price is set when you open the contract and doesn’t change. It’s locked in, no matter where the market goes. That makes it a key number in every options trade.

The strike price meaning becomes clear when you look at whether an option is worth using. If it would lead to a profit, it’s in-the-money. If not, it’s out-of-the-money. That’s where the strike helps calculate something called intrinsic value - basically how much cash you’d make right now if you exercised the option.

What Does Exercising an Option Mean?

Exercising an option means you choose to use the contract. For calls, that means buying the stock at the strike price. For puts, it means selling at the strike. Most traders sell the option instead, but understanding exercise helps explain the math behind each trade. For example, suppose stock ABC is trading at $55 and you hold a call option with a strike of $50 -  if you exercise it, you buy the stock for $50 instead of $55, locking in a $5 gain.

When it comes to puts, it works in the opposite way: if ABC drops to $45 and you hold a $50 put, exercising lets you sell at $50 instead of the lower market price.

Strike price meaning and how it relates to moneyness

Moneyness tells you if an option would make money right now. It depends on how the strike price in options compares to the current stock price.

Let’s say a stock trades at $100. Here’s how it breaks down for calls:

• A call option strike price of $95 is in-the-money (you could buy at $95 and sell at $100)
• A strike at $100 is at-the-money
• A strike at $105 is out-of-the-money (you’d lose money if you exercised it)

This same idea works in reverse for puts, in fact here's a summary of the call and put moneyness concept:

The strike price meaning changes depending on where the market is. In-the-money options cost more because they already have value. Out-of-the-money ones are cheaper, but they only pay off if the market moves your way.

Moneyness affects:

• The premium you pay
• The risk/reward profile
• How likely the trade is to work

That’s why strike selection is not random - it reflects your strategy.

How the strike price works in stock options with physical assignment

When a stock option is exercised and assignment happens, shares are actually bought or sold at the strike price in options. Specifically, here is what happens:

• If you hold a call option strike price of $50 and get assigned, you’ll need to buy 100 shares at $50, no matter the current market price
• If it’s a put, and you’re assigned, you’re forced to sell 100 shares at the strike, even if the stock is lower

Here’s a clear strike price example: if the stock is at $55 and your call strike is $50, you’ll pay $5,000 (100 shares x $50). You immediately own stock worth $5,500.

This is why understanding the strike price meaning matters - assignment impacts your account balance. You need to have the cash (or margin) ready. If you're trading stock options, managing risk means knowing how much a position might cost or credit if it’s exercised.

How to choose the right strike price in options

There’s no one best strike price in options. It depends on what you think the stock will do, how much risk you’re okay with, and what kind of trade you’re planning.

If you think the stock will move a lot, further out-of-the-money strikes might make sense. They’re cheaper and offer more upside, but the trade-off is lower odds of success. If you expect a small move, you might pick an at-the-money or in-the-money strike instead. These cost more but are more likely to end up profitable.

Here’s how to think about it:

• Out-of-the-money = lower price, lower odds, higher potential reward
• At-the-money = balanced risk and cost
• In-the-money = higher cost, higher probability of finishing profitable

Delta helps here too. A high delta means the option behaves more like stock. A low delta means the price moves slower and has less chance of ending in the money.

Volatility also matters. In volatile markets, you might want wider strike choices. In a flat market, closer strikes tend to work better.

Don’t forget expiration. A short-term trade usually pairs best with a strike close to the current price. A long-term outlook might allow for strikes further out.

One simple strike price example: If stock is at $50 and you’re bullish short-term, a $50 or $52.50 call option strike price could work. But if you’re aiming for a bigger breakout over months, a cheaper $60 strike might be more appealing.

Put and Call option strike price strategy and considerations

A call option gives you the right to buy stock at the strike price, while a put option lets you sell at that price. The strike price in options plays a big role in setting both risk and reward.

With a call option strike price, the lower it is, the more the option costs but the higher the chance of profit. A higher strike costs less but needs a bigger move to pay off. It’s the opposite for puts: lower strikes are cheaper but riskier, while higher ones offer more downside protection.

Here’s how the risk-reward shifts:

• Deep ITM = higher cost, more certainty
• ATM = balanced tradeoff
• OTM = cheaper, needs bigger price move

Traders selling calls (like in covered calls) often pick strikes just above the current stock price to collect premium with limited upside risk. Whether you’re buying or selling, picking the right strike price in options shapes the entire trade.

Strike price example: Covered call comparison

A covered call is a strategy where you own 100 shares of a stock and sell a call option on it. You keep the premium, but if the stock rises above the strike price, you may have to sell your shares. This strategy is available on our screener for the options market. In short, the profit and loss chart of this strategy looks like this:

As you can see, you have potentially unlimited loss on the left, and a fixed reward on the right. The breakeven point of your strategy and the amount of money you can earn or lose will largely depend on the strike price you select.

Just to be clear, let’s compare two covered call setups using the same stock, PYPL, currently trading at $72.47:

Scenario 1: Sell the $67.5 call expiring in 5 weeks

Suppose you have this P&L chart:

Here are the details of example:

• Stock is bought at $72.47
• Call option strike price is $67.5
• Premium received is $6.45
• Max gain: $67.5 (strike) + $6.45 (premium) − $72.47 (stock cost) = $1.48 per share = $148 total
• Breakeven: $72.47 − $6.45 = $66.02

Scenario 2: Sell the $65 call expiring in 5 weeks

Suppose you now have this P&L chart:

Once again, here are the details of example:

• Stock is bought at $72.47
• Call option strike price is $65
• Premium received is $8.50
• Max gain: $65 (strike) + $8.50 (premium) − $72.47 = $1.03 per share = $103 total
• Breakeven: $72.47 − $8.50 = $63.97

This strike price example shows how different call option strike price choices create different outcomes. The $65 strike gives more premium and higher chance of assignment. The $67.5 strike offers more profit probability but less immediate income.

The best strike price in options depends on how bullish you are. More bullish? Go higher. Want more income now? Pick a closer strike.

Strike price selection vs expiration date

The expiration date changes how the strike price in options behaves. In shorter-term trades, at-the-money strikes lose value fast due to time decay. Out-of-the-money strikes may expire worthless if the move doesn’t happen in time. That’s why short-term strategies often pair with closer strike prices.

Longer expirations give the trade more time to work but cost more upfront. Volatility also matters - high implied volatility boosts premiums, especially on longer-dated contracts.

To make the most of a strike price in options, align it with:

• Your price target
• The time you expect the move to happen
• Current volatility conditions