Strike price

The strike price is the fixed price at which the holder of an option has the right to buy or sell the underlying stock. It is set when the option contract is created and does not change over the life of the contract, no matter how far the stock's actual market price moves away from it.

For a call option, the strike price is what the holder can pay to buy the stock, so a call becomes more valuable as the stock rises further above the strike. For a put option, the strike price is what the holder can receive for selling the stock, so a put becomes more valuable as the stock falls further below the strike. Where the stock's current price sits relative to the strike determines whether an option is in the money, at the money, or out of the money, which is one of the biggest drivers of how much the option costs and how it behaves as expiration approaches.

Exchanges list options at a range of standardized strike prices around the current stock price, typically spaced at fixed intervals, and add new strikes as the stock moves. Choosing a strike price is one of the central decisions in any options trade, a strike closer to the current stock price costs more but requires a smaller move to become profitable, while a strike further away costs less but needs a bigger move in the right direction to pay off.