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Contents
Strike Definition: What Does Strike Mean
Vitaly Makarenko
Chief Commercial Officer
Demetris Makrides
Senior Business Development Manager
In the trading world, the strike price is simply the "locked-in" price at which you’ve agreed you can buy or sell a stock later on.
Think of it as a pre-negotiated deal. If you hold an options contract, the strike price is the specific number that stays the same, no matter how much the stock market zig-zags. If you have a Call option, the strike is what you’ll pay to buy the shares. If you have a Put, it’s the price you’re guaranteed to get when you sell them.
Why the Strike Price Actually Matters
Choosing a strike price is where the real strategy happens. It’s the "line in the sand" that determines if your trade makes money or ends up worthless.
When you look at a list of options (the "options chain"), you’ll see dozens of strikes. Picking one isn't just about the price of the stock today; it’s about where you think that stock is headed and how much risk you’re willing to stomach to get there.
How it Works: Calls vs. Puts
The way the strike price behaves depends entirely on which side of the trade you are on.
The Call Option (The Buy Side)
When you buy a call, you’re hoping the stock price shoots way past your strike.
- The Goal: Buy low, sell high.
- Example: You hold a $150 strike call on Apple. If Apple hits $175, you’re in a great spot. You have a legal contract that lets you buy those shares for $150, even though everyone else has to pay $175.
The Put Option (The Sell Side)
A put is basically insurance. You want the stock price to tank below your strike.
- The Goal: Sell high, buy back low.
- Example: You have a $50 strike put on a retail company. If the company’s stock price drops to $30, your contract is gold. You can sell your shares for $50 when they are only worth $30 on the open market.
The Three States of a Strike Price
Traders use some slightly weird shorthand to describe where the stock sits compared to the strike. It’s called "Moneyness."
| Term | What it feels like | The Reality |
| In-the-Money (ITM) | The Safe Bet | Your strike is already better than the current market price. These cost more to buy. |
| At-the-Money (ATM) | The Toss-up | The stock price and strike price are basically identical. |
| Out-of-the-Money (OTM) | The Long Shot | The stock hasn't reached your strike yet. These are cheap, but they expire worthless if the stock doesn't move. |
Expert Insight: The Lotto Ticket Trap
New traders often gravitate toward Out-of-the-Money (OTM) strikes because they are cheap – sometimes only $5 or $10 per contract. In the industry, we call these "lotto tickets." While the payout can be huge if a stock explodes, the statistical reality is that about 70-80% of these expire worthless. If you want to stay in the game, don't make OTM strikes your entire portfolio.
How to Actually Pick a Strike Price
Don't just pick the cheapest one. Follow this logic instead:
- Check your timeline: If your option expires in three days, don't pick a strike price that is 20% away from the current price. The stock likely won't move that fast.
- Look at the Delta: Most trading apps show a number called Delta. A Delta of .50 means there’s roughly a 50% chance the stock will hit that strike. If the Delta is .05, the market is telling you there’s only a 5% chance. Listen to the market.
- Calculate your Break-Even: This is the mistake that kills most beginners. If your strike is $100 and you paid $5 for the option, the stock has to hit $105 before you actually see a profit.
Common Myths vs. Reality
- Myth: "I have to wait until expiration to do something with my strike price."
- Reality: You can sell your option at any time. If the stock moves toward your strike and the value of your contract goes up, you can take your profit and run. You don't have to actually buy the shares.
- Myth: "A lower strike is always better for calls."
- Reality: Lower strikes are safer, but they are also much more expensive. Sometimes a slightly higher strike offers a better "bang for your buck" if you are very confident the stock will rally.
Expert Insight: Watch the Spread. When picking a strike, look at the "Bid" and the "Ask" prices. If the difference (the spread) is huge – like a $1.00 Bid and a $1.50 Ask – avoid that strike. It means there aren't enough traders active at that price, and you'll lose a chunk of money just trying to get in and out of the trade. Stick to strikes with high "Volume" or "Open Interest."
FAQ
Usually, nothing good. An option that sits exactly on the strike has no "intrinsic value." If it stays there until expiration, it usually expires worthless, and you lose the money you paid to buy it.
Not on the same contract. You’d have to sell your current contract and buy a new one with a different strike. Traders call this "rolling" your position.
It depends on how popular the stock is. High-volume stocks like Tesla or SPY have strikes every $0.50 or $1 because so many people trade them. Smaller companies might only have strikes every $5.
If you are the buyer, you have the right, but not the obligation. Most retail traders just sell the contract back to the market for a profit rather than actually buying the shares.
