Option Strike Prices

Option Strike Prices

Options will always have a variety of different set price levels which are known as ‘Strike Prices’.

These different strike prices are the prices where an options investor can secure the right to buy or sell the underlying instrument.

Often times, the strike price might be referred to as the ‘exercise price’.

While an option will always have a strike price, it is possible for some underlying assets to have more strike prices than other underlying assets.

For example, an inexpensive stock might have strike price increments of two dollars and fifty cents ($2.50) while a more expensive stock might have strike prices in increments of five dollars ($5.00) to even larger increment amounts.

Let's take a look at an example:

Let's say that trader Bob is looking to invest in the stock ABC which is currently trading at around twenty five dollars ($25.00) a share.

Now trader Bob feels that the shares will be rising shortly, but he really doesn’t want to tie up the money it will take to purchase the stock outright.

So he decides to purchase a call option instead of purchasing the actual shares of the stock.

In this case, he purchases the front month twenty seven dollar and fifty cents ($27.50) call option.

Now this particular call option gives Bob the ‘right’ - but not the obligation - to purchase the shares of ABC stock at twenty seven dollars and fifty cents ($27.50) at any time he wishes, all the way up until expiration day.

To continue our example, let’s say that after Bob purchases this call option - the shares of ABC suddenly take off, trading all the way up to thirty dollars a share ($30.00).

Since Bob has the right to be long ABC stock from twenty seven dollars and fifty cents ($27.50), he is now looking at a profit of $2.50 per share minus what ever the premium was that he paid for the option.

Although we’ll be getting more into the specifics and the differences of call options and put options shortly, it’s important to have a good grasp and knowledge of how options work before attempting to use them with the different available option strategies.