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Strike price





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Infinance, the strike price (orexercise price) of an option is a fixed price at which the owner of the option can buy (in the case of a call), or sell (in the case of a put), the underlying security or commodity. The strike price may be set by reference to the spot price, which is the market price of the underlying security or commodity on the day an option is taken out. Alternatively, the strike price may be fixed at a discount or premium.

Strike price labeled on the graph of a call option. To the right, the option is in-the-money, and to the left, it is out-of-the-money.

The strike price is a key variable in a derivatives contract between two parties. Where the contract requires delivery of the underlying instrument, the trade will be at the strike price, regardless of the market price of the underlying instrument at that time.

Moneyness

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Moneyness is the value of a financial contract if the contract settlement is financial. More specifically, it is the difference between the strike price of the option and the current trading price of its underlying security.

In options trading, terms such as in-the-money, at-the-money and out-of-the-money describe the moneyness of options.

Mathematical formula

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Acall option has positive monetary value at expiration when the underlying has a spot price (S) above the strike price (K). Since the option will not be exercised unless it is in-the-money, the payoff for a call option is

 

also written as

 

where

 

Aput option has positive monetary value at expiration when the underlying has a spot price below the strike price; it is "out-the-money" otherwise, and will not be exercised. The payoff is therefore:

 

or

 

For a digital option payoff is  , where   is the indicator function:

 

See also

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References

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Retrieved from "https://en.wikipedia.org/w/index.php?title=Strike_price&oldid=1181953494"
 



Last edited on 26 October 2023, at 06:30  





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This page was last edited on 26 October 2023, at 06:30 (UTC).

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