What is Strike Price?

What Is A Strike Price?

The strike price (also called the exercise price) is the fixed price at which you have the right to buy or sell the underlying asset when you trade options.

For a call option, the strike price is the level at which you can buy the underlying.
For a put option, the strike price is the level at which you can sell the underlying.

Why it matters: the strike price is the anchor for the option’s payoff. It helps determine whether an option is in, at, or out of the money, and how much you could gain or lose if the market moves.

To make this concrete, we will use one simple example throughout the article:

You buy a call option on Share XYZ with a strike price of $100 when the share is currently trading at $95.

Later in the article, we will revisit this same example to explain moneyness, intrinsic value, breakeven, and how to select strikes.

As the market price of XYZ moves above or below $100, the value of your option changes – but the strike price itself never moves. It stays fixed from the moment the option is created until it expires.

Moneyness At A Glance

Once you know the strike price, the next key idea is moneyness – whether an option is currently in profit if you exercised it right now.

We’ll keep using the same example:

You buy a call option on Share XYZ with a strike price of $100 when the share is trading at $95.

Here is how moneyness works in simple terms:

Term	Call Option (Right To Buy)	Put Option (Right To Sell)
In The Money (ITM)	Market price is above the strike price	Market price is below the strike price
At The Money (ATM)	Market price is very close to the strike price	Market price is very close to the strike price
Out Of The Money (OTM)	Market price is below the strike price	Market price is above the strike price

Using our XYZ example with a $100 call:

• If XYZ is trading at $104, your call is in the money – the market is above your strike.
• If XYZ is trading at around $100, your call is at the money.
• If XYZ is trading at $95, like when you entered, your call is out of the money – the market is still below your strike.

For a put option, it is the opposite:

• If you had a $100 put on XYZ and the share is now at $94, that put is in the money (you have the right to sell at $100 when the market is at $94 ).
• If XYZ is near $100, the put is at the money.
• If XYZ is up at $106, the put is out of the money.

Two important points:

• Moneyness changes with the market, but the strike stays fixed.
• Moneyness affects the option’s price, risk profile, and how traders use it (for hedging or speculation).

Ready to explore ITM, ATM, and OTM options in real time? Download the AvaOptions trading app and follow live prices as you learn.

Intrinsic Vs Time Value

When you look at an option price (the premium you pay or receive), you are really looking at two components:

• Intrinsic value – what the option would be worth right now if you exercised it.
• Time value – extra value the market adds for “what might happen” before expiry.

In simple terms:

• Option price = intrinsic value + time value

Intrinsic Value: The Here-And-Now Part

By definition:

• Call intrinsic value = max(0, Spot − Strike)
• Put intrinsic value = max(0, Strike − Spot)

So:

• If the option is out of the money (OTM), its intrinsic value is zero.
• If it is at the money (ATM) at expiry, both call and put have zero intrinsic value.
• Only in-the-money (ITM) options have positive intrinsic value.

Using our running example:

You buy a $100 call on XYZ when it trades at $95.

• At that moment, the call is OTM → intrinsic value = max(0, 95 − 100) = 0.
• If, at expiry, XYZ is $108, the call is ITM → intrinsic value = max(0, 108 − 100) = $8.
• If, at expiry, XYZ finishes exactly at $100, the call is ATM → intrinsic value = max(0, 100 − 100) = $0.

For a $100 put on XYZ:

• If XYZ is $94 at expiry → put intrinsic value = max(0, 100 − 94) = $6.
• If XYZ is $100 at expiry → intrinsic value = $0 (ATM).
• If XYZ is $106 at expiry → intrinsic value = max(0, 100 − 106) = $0 (OTM).

Time Value: The “What-If” Part

Time value is everything in the option price above intrinsic value. It reflects:

• Time left to expiry.
• Market expectations about future volatility.
• Interest rates and other market factors.

Back to our $100 call example:

• Suppose you pay a $3 premium when XYZ is at $95 (OTM).
  • Intrinsic value = 0 (still below the strike).
  • Time value = full $3 – the market is charging you purely for the possibility that XYZ could rise above $100 before expiry.

Later, XYZ rises to $108 before expiry and the option trades at, say, $9:

• Intrinsic value = 108 − 100 = $8.
• Time value = 9 − 8 = $1 (there is still some uncertainty until expiry).

As expiry approaches, time value naturally decays, and at the moment of expiry, time value becomes zero. The option is then worth purely its intrinsic value, or nothing if it is not in the money.

Strike, Premium, And Breakeven

The strike price and the premium together determine your breakeven at expiry:

• Call option breakeven at expiry ≈ Strike + Premium
• Put option breakeven at expiry ≈ Strike − Premium

Using numbers:

• You buy the $100 call for $3:
  • Breakeven at expiry ≈ $100 + $3 = $103.
  • If XYZ expires at $108, your theoretical profit ≈ (108 − 100) − 3 = $5.
  • If XYZ expires at $102, intrinsic value is $2, which is less than the $3 premium, so you still have a net loss of $1.

For a $100 put bought for $3:

• Breakeven at expiry ≈ $100 − $3 = $97.
• If XYZ expires at $94, your approximate profit ≈ (100 − 94) − 3 = $3.
• If XYZ expires at $99, intrinsic value is $1, less than the $3 you paid, so overall you are still at a net loss.

This is why strike selection matters: a different strike usually means a different premium and therefore a different breakeven point.

Want to explore how strike, premium, and breakeven interact on real markets? Open an AvaTrade demo account and test different scenarios risk free.

How To Choose A Strike Price

Choosing the right strike price is really about balancing three things:

• Your goal – hedge or speculate?
• Your time horizon – short term or longer term?
• Your risk–reward trade-off – cheaper but less likely to profit, or more expensive but higher probability?

We will keep using our running example:

You are looking at options on Share XYZ, currently trading at $95.

Step 1 – Define Your Goal

Ask yourself first: What am I trying to achieve with this option?

• Hedge an existing position – You already hold the underlying (or a highly correlated CFD) and want to limit downside.
• Speculate on a move – You do not hold the underlying and want to profit from a directional view (up or down).

Your goal will drive the type of option (call or put) and where you place the strike relative to the current market price.

Step 2 – Decide On Your Time Horizon

Next, think about when you expect the move (or risk) to play out:

• Short-term view (days to a few weeks): You will usually focus on strikes closer to the current price (ATM or slightly ITM/OTM), because you have less time for a large move.
• Medium- to longer-term view (weeks to months): You might accept slightly further OTM strikes if you think a bigger move is realistic over time, but remember that time value will still decay.

The less time you have, the more careful you need to be about choosing a strike that is too far away from the current price.

Step 3 – Choose The Moneyness Range

Now you can choose a moneyness “zone” that fits your plan:

• In-The-Money (ITM)
  • Higher premium, higher probability of having intrinsic value.
  • Often used when you prefer a more conservative payoff profile.
• At-The-Money (ATM)
  • Balanced choice: premium and probability both in the middle.
  • Often preferred when you expect a decent move but want to stay close to the current level.
• Out-Of-The-Money (OTM)
  • Lower premium, lower probability of expiring in the money.
  • Attractive for lower-cost, high-upside but lower-probability

For example, with XYZ at $95:

• ITM call might have a strike around $90–$92.50.
• ATM call might be at $95.
• OTM call might be at $100 or higher.

The key idea: cheaper does not mean better. Extremely cheap options are often far OTM, with a low chance of profit.

Strike Price for Hedging Vs Speculation

Protective Put (Hedging An Existing Position)

Suppose you already own XYZ at $95 and want downside protection.

A protective put means you:

• Hold the underlying (or a long CFD exposure).
• Buy a put option with a chosen strike.

Common hedge choices:

• ATM or slightly OTM put (e.g. $95 or $92.50):
  • Costs more in premium, but protects you earlier if the price falls.
  • Closer to a traditional “insurance” feel.
• Further OTM put (e.g. $90):
  • Cheaper premium, but you only get protection once the price has already dropped below that level.
  • Suitable if you are willing to tolerate some drawdown before the hedge kicks in.

Here, the strike is essentially your protection floor – the level below which the put starts to offset losses in your underlying position.

Speculative Call (Directional Upside View)

Now imagine you do not own XYZ, but you think it could rise over the next month.

You could buy:

• ATM or slightly ITM call (e.g. $95 or $92.50)
  • Higher premium.
  • Higher probability the option finishes with intrinsic value if you are roughly right.
• OTM call (e.g. $100 or $105)
  • Lower premium.
  • You need a larger move for the trade to be profitable.
  • If XYZ only drifts up modestly, the option may still expire worthless.

In practice, many traders will adjust strike selection based on their conviction and risk tolerance:

• High conviction, willing to pay more → closer-to-ATM or slightly ITM strikes.
• Lower conviction, limited capital, happy to risk a full premium loss for bigger upside → carefully chosen OTM strikes.

Want to experiment with different hedging and speculative strikes? Try them out first in an AvaTrade demo account with no real capital at risk.

Common Mistakes When Choosing A Strike Price

Even experienced traders can misjudge strike selection. Here are some of the most frequent pitfalls to be aware of:

1. Chasing Very Cheap, Far OTM Options – Ultra-low premiums can be tempting, but very far out-of-the-money strikes often come with a low probability of expiring in the money. Many of these options expire worthless, which can add up to repeated small losses over time.
2. Ignoring Time To Expiry – Picking a strike without considering how soon you expect the move can be costly. A far OTM strike with only a short time to expiry needs an aggressive move very quickly. If the move is slower or smaller than expected, the option’s time value can decay faster than the price moves in your favour.
3. Treating Options Like Guaranteed Leverage – Some traders choose strikes purely because the options look “cheap” compared to the underlying, as if this guaranteed high-percentage returns. In reality, the entire premium is at risk, and the leverage cuts both ways: small moves against you, or even sideways markets, can erode the option value rapidly.
4. Forgetting Time Value Can Be Lost Even In ITM Options – A call or put can be in the money and still lose value if time value decays faster than intrinsic value increases. Choosing a strike that is only slightly ITM but with very little time left may not behave as expected if the market moves gradually rather than sharply.
5. Not Matching Strike To The Underlying Objective – Using very aggressive speculative strikes when your real goal is protection, or vice versa, is a common mismatch. For example, a deep      OTM put as “protection” might only start to help after a large drop, which may not align with your risk tolerance.

Being aware of these mistakes can help you select strikes more deliberately and align each trade with a clear objective.

Option Style And Strike Price: American Vs European

Another factor that sits in the background of your strike price choice is the option style – mainly American versus European.

You do not need to be an expert in contract law, but it helps to know the basics and how they relate to the strike.

American Style Options

• Can be exercised at any time from the moment you open the position until expiry.
• Once the option is in the money, the strike price becomes the level at which you could choose to exercise early.

In practice, many retail traders do not physically exercise American-style options. Instead, they:

• Close the position by selling the option back or
• Let the option reach expiry and settle in cash or via the platform’s process (depending on product and jurisdiction).

The key point: the strike price remains the anchor for whether early exercise would make sense, but most strategies focus on trading the option’s price, not exercising it.

European Style Options

• Can only be exercised at expiry, not before.
• The strike price still defines the payoff – at expiry, the option’s value is calculated from the difference between the market price and the strike.

For most short-term traders, the experience of trading European-style options is very similar to American-style when viewed on a platform:

• You monitor the option’s price, not the legal exercise mechanics.
• You can usually close your position before expiry by selling the option, regardless of style.

What This Means for Strike Selection

For many retail strategies (hedging or short-term speculation):

• The style does not radically change how you pick a strike.
• You still decide based on moneyness, time horizon, and risk–reward.
• The strike remains the reference level for your potential payoff at or before expiry.

What matters most is that you understand:

• Where your strike is relative to the current market price.
• How that affects premium, breakeven, and possible profit or loss.

Curious how different strikes behave in real market conditions? Open a demo account to explore available options on your chosen markets.

Risks, Costs, and Eligibility Reminder

Strike price is only one part of the options picture. Before placing any trade, it is important to understand the risks, the costs, and whether the product is appropriate for you.

Key Risks To Be Aware Of

• Full Premium At Risk – When you buy an option, the entire premium you pay is at risk. If the market does not move in your favour before expiry, the option can expire worthless, regardless of your chosen strike.
• Leverage Cuts Both Ways – Options often provide leveraged exposure to the underlying market. A relatively small move in the underlying can lead to a large percentage change in the option price – both up and down. Choosing an aggressive strike does not remove this risk.
• Time Decay (Theta Risk) – Time value erodes as expiry approaches, all else equal. Even with a well-chosen strike, a slow or sideways market can mean that time decay offsets any small favourable price moves in the underlying.
• Gap Risk And Volatility – Sudden price gaps or volatility spikes around news or economic data can quickly change the moneyness of your option. This can work in your favour or against you and may affect the option’s liquidity and pricing.

Costs And Trading Conditions

Depending on the product and jurisdiction, your total trading cost can include:

• The option premium
• Bid–ask spreads when opening and closing positions.
• Any relevant commissions, financing, or overnight fees where applicable (for example, when using options-related CFDs or structured products).

These costs interact with your strike choice and breakeven level – a strike that looks attractive on paper should still be considered in the context of the total cost to enter and exit the trade.

Product Availability And Eligibility

Options and derivatives are not suitable for all investors. Availability can depend on:

• Your country of residence and local regulations.
• Your trading experience, objectives, and financial situation.
• The specific AvaTrade entity or platform you are registered with.

Before trading, carefully read all relevant risk disclosures and ensure you understand how the product works, including how strike prices, expiry, and settlement are handled on your chosen platform.

Summary And Practical Takeaways

The strike price is the fixed level at which you can buy or sell the underlying when you trade options. It never moves – but it shapes almost everything about how your option behaves.

Here is what to remember:

• Strike Price Is Your Anchor – It defines whether an option is in, at, or out of the money, and how much intrinsic value it can have at or before expiry.
• Moneyness Changes, Strike Does Not – As the market price moves around your strike, the option’s moneyness changes – and so does its value. ITM, ATM, and OTM are simply ways to describe where the market is relative to that fixed strike.
• Intrinsic Value Plus Time Value – The option premium is a combination of intrinsic value (if any) and time value. Time value reflects what could happen before expiry and decays over time, even if the strike and market do not move much.
• Strike and Premium Determine Breakeven – Your breakeven at expiry is roughly (strike + premium) for calls and (strike – premium) for puts. Cheaper, far OTM strikes may look attractive, but they usually require a larger move just to get to breakeven.
• Match Strike to Your Objective – For hedging, traders often look at ATM or slightly OTM puts to define a sensible protection floor. For speculation, they may choose ATM or slightly ITM strikes for higher probability, or carefully chosen OTM strikes if they are comfortable with the risk of a full premium loss.
• Avoid Common Strike Mistakes – Chasing very cheap, far OTM options, ignoring time to expiry, or using speculative strikes for protection can all undermine your strategy. Always link your strike choice back to your goal, time horizon, and risk tolerance.

Above all, treat the strike price as a planning tool: a clear reference point that helps you structure trades, define risk, and understand how different scenarios may unfold.

Ready to put these ideas into practice? Open an AvaTrade demo account and start exploring how different strike prices behave in real market conditions.

FAQ

• What is a strike price in options trading?

  It is the fixed price at which you have the right to buy or sell the underlying asset when you exercise the option.

   
• How does the strike price affect whether an option is in the money?

  For calls, the option is in the money when the market price is above the strike; for puts, it is in the money when the market price is below the strike.

   
• Is it better to choose an ATM or OTM strike?

  ATM strikes usually balance cost and probability of profit, while OTM strikes are cheaper but need a bigger move and carry a higher chance of expiring worthless.

   
• Can I lose more than my premium when I buy options?

  When you buy standard options, your maximum loss is normally the premium paid plus costs, but selling or writing options can involve greater and potentially unlimited risk.

   

** Disclaimer – While due research has been undertaken to compile the above content, it remains an informational and educational piece only. None of the content provided constitutes any form of investment advice.