Strike price

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In options, the strike price, or exercise 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 spot price (market price) of the underlying instrument at that time.

Definition - The fixed price at which the owner of an option can purchase, in the case of a call, or sell, in the case of a put, the underlying security or commodity. It's the price at which the stock will be bought or sold when the option is exercised.

The strike price is often called the exercise price.

For example, an IBM May 50 Call has a strike/exercise price of $50 a share. When the option is exercised the owner of the option will buy (Call option) 100 shares of IBM stock for $50 a share.

[edit] Moneyness

Moneyness is a term describing the relationship between the strike price of an option and the current trading price of its underlying security. Where settlement is financial, the difference between the strike price and the spot price will determine the value, or "moneyness", of the contract.

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

A call option would be in-the-money if the stock price were trading above the exercise price. A put option is in-the-money if the exercise price is higher than the market price of the underlying stock.

A call or put option is at-the-money if the stock price and the exercise price are the same.

A call option is said to be out-of-the-money if the stock price is lower than the exercise price of the option. A put option is out-of-the money if the stock price is higher than the exercise price of the option.

[edit] Mathematical Formula

A call option has positive monetary value 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

$\max\left[(S-K);0\right]$

also written as

$(S-K)^{+} \$

where

$(x)^+ =\{^{x\ \ x\geq0}_{0\ \ x<0}$

A put option has positive monetary value 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

$max\left[(K-S);0\right]$