Strike Price

Also known as the exercise price, the strike price determines when a derivative contract may be bought (call option) or sold (put option).

 

As derivatives derive their value from other financial investment tools, the strike price of an option may be established when the relevant contract is written, but it is only relevant relative to the market price of an underlying security. Practically speaking, it only makes sense to exercise the right to sell or buy at strike price if the price of an underlying security is such that exercising the option will make the investor a profit. Most of the time, if an option is “out of the money” as a result of this calculation, it is not generally profitable. When an option is “in the money” relative to this calculation, it is generally profitable.

 

EXAMPLE:

Investor: “I only want you to move when the strike price allows us to trade in the money. So we can make money. So my wife gets off my back about being able to afford a new condo in Boca.”