Economics Options And Futures Questions Medium
The strike price, also known as the exercise price, plays a crucial role in options trading. It is the predetermined price at which the underlying asset can be bought or sold when exercising the option. The strike price determines the profitability and potential risks associated with an options contract.
For call options, the strike price is the price at which the holder has the right to buy the underlying asset. If the market price of the asset exceeds the strike price, the call option becomes profitable. On the other hand, if the market price is below the strike price, the call option may not be exercised as it would result in a loss.
For put options, the strike price is the price at which the holder has the right to sell the underlying asset. If the market price of the asset falls below the strike price, the put option becomes profitable. Conversely, if the market price is above the strike price, exercising the put option would result in a loss.
The strike price also influences the premium, or the price, of the options contract. Generally, options with lower strike prices tend to have higher premiums, as they offer a greater chance of being profitable. Conversely, options with higher strike prices have lower premiums, as they are less likely to be profitable.
In summary, the strike price is a crucial element in options trading as it determines the profitability and risk associated with the options contract. It provides the basis for deciding whether to exercise the option or let it expire, and also influences the premium of the options contract.