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Strike Price in Options

In the derivative market strike price is a common terminology and the meaning of strike price is known to all the investors. T<br>he strike price is the future set price at which the derivative contract is to be traded on a pre-decided date. <br>There are two types of options contracts mainly call and put options. In the call options, the strike price is referred to the cost at which the asset is bought. While for put options, the strike price(https://www.edelweiss.in/investology/introduction-to-derivative-markets-8335c5/strike-price-in-options-0a0041) is the cost at which the asset is sold.<br>

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Strike Price in Options

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  1. Strike price in options

  2. Introduction In the derivative market strike price is a common terminology and the meaning of strike price is known to all the investors. T he strike price is the future set price at which the derivative contract is to be traded on a pre-decided date. There are two types of options contracts mainly call and put options. In the call options, the strike price is referred to the cost at which the asset is bought. While for put options, the strike price is the cost at which the asset is sold.

  3. Factors to choose your strike price • Risk Tolerance: Risk tolerance is one of the important parameters which you should consider while you set the strike price. Your risk appetite will decide the strike price for you. The different types of options have different risk levels. With different risk tolerance, you can decide the type of options contract which are ITM, ATM, and OTM. In the money, option contract goes well with option buyer whereas out of money goes well with option seller. • Risk Reward Payoff: This is correlated to the risk tolerance parameter. If you are a risk savvy investor you can opt for an ‘In the Money’ or ‘At the money’ type of contract. Investors can opt for an OTM contract if the risk tolerance is high. • Implied Volatility: Every stock option is associated with different volatility levels. This parameter is influenced by various factors like fluctuations in the industry, changes in government policies, and other global factors, etc. • Volume/Liquidity: This is another important factor that helps in determining the strike price. The liquidity of the underlying asset will help you determine the profitability of the trade. If the asset has higher liquidity you can yield better profits before the expiry date of the contract. Lower liquidity does not offer much profit when you exit the trade.

  4. Conclusion If you are someone interested in the derivative market hope this article clears your doubts around the strike price concept. The strike price is an integral parameter when you enter any type of derivative contract. Hence, you must understand what is strike price in options and how to determine strike price basis various factors mentioned above. You should learn about derivatives even more to get a hold on the concept and become an active trader in the derivative markets.

  5. THANK YOU

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