Strike Price: What It Means in Options Trading (The Pre-Decided Price of the Option)

If you’re learning options trading, you’ll see one term everywhere: strike price.

Whether you’re looking at a call option or a put option, the strike price is one of the most important numbers in the entire contract. It influences how much an option costs, how risky it is, and how much the underlying stock must move before you can profit.

In simple terms:

The strike price is the pre-decided price at which an option lets you buy or sell the underlying asset.

In this beginner-friendly guide, we’ll explain what the strike price means, how it works in call and put options, how it affects profitability, and what “in the money” and “out of the money” mean—using realistic U.S. market examples.

---

What Is a Strike Price?

A strike price (sometimes called the exercise price) is the set price written into an options contract.

It’s the price at which the option holder can buy or sell the underlying asset if they choose to exercise the contract.

Strike Price Definition (Plain English)

The strike price is the “locked-in price” you get with an option contract.

Depending on the type of option:

• Call option strike price: the price you can buy the stock for
• Put option strike price: the price you can sell the stock for

This strike price is decided when the options contract is created, and it doesn’t change—even if the stock price moves wildly.

---

Strike Price in a Call Option (Right to Buy)

A call option gives you the right to buy a stock at the strike price before expiration.

Call Option Example

Imagine Stock ABC is currently trading at $100 per share.

You buy a call option with a:

• Strike price: $105
• Expiration: 30 days from now

This means:

✅ You have the right to buy Stock ABC for $105 per share, even if the stock rises to $120 later.

If the stock stays below $105, the call option may not be worth exercising.

---

Strike Price in a Put Option (Right to Sell)

A put option gives you the right to sell a stock at the strike price before expiration.

Put Option Example

Stock ABC is trading at $100 per share.

You buy a put option with a:

• Strike price: $95
• Expiration: 30 days from now

This means:

✅ You have the right to sell Stock ABC for $95 per share, even if the stock falls to $80.

That’s why put options are often used as a hedge or as a way to profit when prices drop.

---

Why the Strike Price Is So Important

The strike price matters because it helps determine:

• when an option becomes valuable
• how much you can profit
• how expensive the option premium is
• how likely your trade is to succeed

It’s one of the biggest “risk vs. reward” levers in options trading.

A Simple Way to Think About It

The strike price is basically the “target level” your stock needs to beat (or fall below) for the option to become profitable.

---

Strike Price and Moneyness: ITM, ATM, OTM Explained

Options traders often describe strike prices using terms like:

• in the money (ITM)
• at the money (ATM)
• out of the money (OTM)

These terms describe whether the strike price is favorable compared to the current stock price.

Let’s use a realistic example:

Stock ABC is trading at $100.

---

Call Options: ITM / ATM / OTM

In the Money (ITM) Call

A call option is in the money when:

Stock price > strike price

Example:

• Stock = $100
• Call strike = $95
  ✅ ITM by $5

This call already has value because you can buy at $95 while the market is $100.

---

At the Money (ATM) Call

A call option is at the money when:

Stock price ≈ strike price

Example:

• Stock = $100
• Call strike = $100
  ⚪ ATM

ATM options are popular because they respond strongly to price movement but may still be reasonably priced.

---

Out of the Money (OTM) Call

A call option is out of the money when:

Stock price < strike price

Example:

• Stock = $100
• Call strike = $110
  ❌ OTM

OTM calls are usually cheaper, but the stock must rise above the strike price before the option becomes profitable at expiration.

---

Put Options: ITM / ATM / OTM

In the Money (ITM) Put

A put option is in the money when:

Stock price < strike price

Example:

• Stock = $100
• Put strike = $105
  ✅ ITM by $5

Because you can sell at $105 while the market price is $100.

---

At the Money (ATM) Put

Example:

• Stock = $100
• Put strike = $100
  ⚪ ATM

---

Out of the Money (OTM) Put

A put option is out of the money when:

Stock price > strike price

Example:

• Stock = $100
• Put strike = $90
  ❌ OTM

OTM puts can be cheaper, but the stock needs to fall below the strike price to become profitable at expiration.

---

How Strike Price Affects Option Profitability

Your option’s strike price helps determine how much the underlying stock has to move before you profit.

Call Option Profit at Expiration (Basic Rule)

For a call option to be worth exercising at expiration:

Stock price must be above the strike price

But to actually profit, it must beat the strike price plus the premium you paid.

---

Put Option Profit at Expiration (Basic Rule)

For a put option to be worth exercising at expiration:

Stock price must be below the strike price

But to actually profit, it must fall below the strike price minus the premium you paid.

---

Strike Price and Break-Even Price (Very Important)

Break-even is the point where you’ve made back your premium cost.

Call Option Break-Even Formula

Break-even = Strike price + premium paid

Example:

• Strike price: $100
• Premium: $3 per share
  Break-even = $103

So at expiration, the stock must be above $103 to profit.

---

Put Option Break-Even Formula

Break-even = Strike price − premium paid

Example:

• Strike price: $100
• Premium: $3 per share
  Break-even = $97

So at expiration, the stock must be below $97 to profit.

---

Realistic U.S. Example: Choosing Different Strike Prices

Let’s say a popular U.S. stock is trading at $50 per share, and you believe it will rise in the next month.

You might see call options like:

• $45 strike call (ITM)
• $50 strike call (ATM)
• $55 strike call (OTM)

Here’s how they differ:

$45 Strike Call (In the Money)

• Costs more (higher premium)
• More conservative
• Stock doesn’t need to rise much to hold value
• Behaves more like owning the stock

This might appeal to investors who want higher probability, lower leverage.

---

$50 Strike Call (At the Money)

• Mid-range premium
• Strong sensitivity to stock movement
• Common choice for directional trades

ATM options are often seen as a balance between cost and responsiveness.

---

$55 Strike Call (Out of the Money)

• Cheapest premium
• Highest potential percentage return if stock rises sharply
• Higher chance of expiring worthless

OTM calls can look attractive because they’re cheap, but many expire worthless if the stock doesn’t move enough.

---

Why Strike Prices Come in “Increments”

In U.S. options chains, strike prices usually appear in a list like:

• $45, $46, $47…
  or
• $50, $55, $60…

The spacing depends on the stock price and liquidity.

Higher-priced stocks might have strike prices spaced wider apart (like $5 increments), while lower-priced or highly liquid stocks may have $1 increments or smaller.

---

Strike Price vs. Stock Price: Don’t Confuse Them

A beginner mistake is mixing up these two numbers:

• Stock price changes constantly throughout the day
• Strike price stays fixed in the contract

The strike price is not “what the stock is worth.” It’s simply the agreement price inside the option.

---

Strike Price and Option Premium: Why Some Strikes Cost More

Strike price affects option premium because it changes how likely the option is to become profitable.

Generally:

Call Option Pricing

• Lower strike calls (ITM) cost more
• Higher strike calls (OTM) cost less

Put Option Pricing

• Higher strike puts (ITM) cost more
• Lower strike puts (OTM) cost less

That’s because “better deals” inside the contract are more valuable.

---

How Beginners Should Think About Strike Price Selection

If you’re just learning options, here are beginner-friendly ways to approach strike prices:

1) Decide Your Goal: Hedge or Speculate?

• Hedging often uses strikes closer to the current price
• Speculation may use ATM or slightly OTM strikes for leverage

2) Watch the Break-Even Point

Knowing your break-even helps you understand how big a move you actually need.

3) Don’t Buy Extremely OTM Options Just Because They’re Cheap

Cheap options can be tempting, but they often expire worthless.

A $0.20 option might feel “low risk,” but the odds may also be low unless the stock makes a huge move fast.

4) Match the Strike Price to Your Timeline

Strike prices don’t work alone—expiration matters too.

A strike that’s realistic in 90 days may be unrealistic in 7 days.

---

Key Takeaways: Strike Price Meaning in Plain English

The strike price is the pre-decided price built into an option contract that determines where you can buy or sell the underlying asset.

Here’s the quick recap:

• Call option strike price = price you can buy at
• Put option strike price = price you can sell at
• Strike price helps determine whether an option is ITM, ATM, or OTM
• Profit depends on strike price plus or minus the premium
• Choosing the right strike is a key part of managing risk and probability

Strike prices may look like “just numbers,” but they shape almost everything about how an option behaves. Once you understand the strike price, options trading becomes far less confusing—and a lot more manageable.