💼 Capital Market Chronicles – Episode 187: OPTIONS STRIKE PRICE (PART I)
Today, we’re diving into one of the most critical elements of options trading — the strike price (also called the exercise price). This is the price at which the holder of an options contract can choose to buy or sell the underlying asset. Think of it as the “target price” 🏹 for your trading strategy.
The strike price is fixed when the option is created, meaning it doesn’t move even if the market price goes on a wild ride 🎢.
📌 Strike Price in Action
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Call Option: Own a call option on Infosys shares with a strike price of ₹1,000 → You can buy shares at ₹1,000 per share, even if the market shoots up to ₹1,100. 💰
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Put Option: Own a put option with a strike price of ₹1,000 → You can sell shares at ₹1,000, even if the market tumbles to ₹900. 🛡️
In short, the strike price sets the battlefield for profit or loss, giving the trader control over when and how to exercise the option.
⚖️ Strike Price vs. Futures Contracts: Unlike futures contracts, where the agreed price can fluctuate until settlement, options have a fixed strike price set at creation. In futures, both buyer and seller are obligated to transact at the contract price on the expiry date, whereas options give the holder the right but not the obligation to buy or sell. Additionally, options provide flexibility with multiple strike prices for a given expiration date, allowing traders to choose one that best matches their strategy, while futures offer less such flexibility.
📝 Example of Strike Prices
Imagine Infosys shares are trading at ₹1,000 (spot price). For December options, available strike prices might be:
₹940, ₹960, ₹980, ₹1,000, ₹1,020, ₹1,040…
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Call Option Example: December call option with strike ₹1,040 → Right to buy shares at ₹1,040, no matter the market price.
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Put Option Example: December put option with strike ₹940 → Right to sell shares at ₹940, even if the market drops lower.
Each strike price represents a decision point where traders weigh risk vs. reward.
💡 How Traders Choose a Strike Price
Selecting the “right” strike price depends on several factors:
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Time to Expiry ⏳ – More time until expiration means more chances for the option to become profitable, potentially increasing its value.
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Volatility 🌪️ – High volatility in the stock price increases the likelihood that the option moves “in the money”, affecting premiums and attractiveness.
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Interest Rates 📈 – Changes in interest rates can impact the cost of holding the underlying asset, influencing which strike prices are appealing.
In essence, picking a strike price is like choosing the right level on a video game boss fight 🎮 — too easy, and you leave potential profit on the table; too hard, and you might miss the mark entirely.
Strike prices set the stage for all options strategies, from protective puts to covered calls. Understanding them is the first step toward mastering options trading.
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