What is the Strike Price in Options?

If you’re stepping into the world of options trading, you’ve probably come across the term strike price. It’s one of the most fundamental concepts that every trader needs to understand. Whether you’re trading NIFTY options, stock options, or commodities, knowing how the strike price works can make or break your trading strategy.

In this blog, we’ll break down the concept of strike price, its impact on options trading, and how you can choose the right one based on your trading goals.

What is a Strike Price?

The strike price (also known as the exercise price) is the predetermined price at which an option contract can be exercised. In simple terms, it’s the price at which you can buy (in case of a call option) or sell (in case of a put option) the underlying asset if you decide to exercise the option.

To put it simply:

• If you buy a call option, the strike price is the price at which you have the right to buy the asset.
• If you buy a put option, the strike price is the price at which you have the right to sell the asset.

For example, if you purchase a NIFTY 19,500 call option, it means you have the right to buy NIFTY at 19,500, no matter where the market price moves.

This is why selecting the correct strike price is so important it directly affects your profitability and risk level.

How Does the Strike Price Impact Profitability?

Your strike price determines whether your option is:

1. In-the-Money (ITM) – When exercising the option results in a profit.
2. At-the-Money (ATM) – When the strike price is equal to the current market price.
3. Out-of-the-Money (OTM) – When exercising the option would lead to a loss.

Let’s take an example:

If a stock is trading at ₹1,000, then:

• A ₹950 call option is ITM (because you can buy at ₹950 when the stock is at ₹1,000, meaning instant profit).
• A ₹1,000 call option is ATM (because there is no immediate profit or loss).
• A ₹1,050 call option is OTM (because buying at ₹1,050 makes no sense when the stock is at ₹1,000).

For put options, the reverse logic applies. If the stock is at ₹1,000:

• A ₹1,050 put option is ITM (because you can sell at ₹1,050 when the stock is at ₹1,000).
• A ₹1,000 put option is ATM.
• A ₹950 put option is OTM.

The further your strike price is from the current market price, the riskier the trade becomes.

Impact of Strike Price on Profitability

The profitability of an option depends on whether it is In-the-Money (ITM), At-the-Money (ATM), or Out-of-the-Money (OTM). Below is a table showing how different strike prices impact profitability in options trading.

Factors to Consider When Choosing a Strike Price

Selecting the right strike price depends on several factors, including your risk appetite, market outlook, and trading strategy. Here are some key factors to keep in mind:

1. Market Volatility

• If the market is highly volatile, ITM or ATM options are generally safer, as they have intrinsic value.
• OTM options are riskier but can yield high returns if the market moves strongly in your favour.

2. Time to Expiry (Time Decay)

• Options lose value over time due to theta decay.
• The further the expiry date, the more flexibility you have, but the premium is also higher.
• For short-term trades, choosing ATM or slightly ITM options can be a safer choice.

3. Your Trading Objective

• For Low-Risk Traders: ITM options are better as they have less risk.
• For High-Risk Traders: OTM options are cheaper and offer higher potential returns but need significant price movement.
• For Balanced Traders: ATM options provide a mix of affordability and probability.

Types of Strike Prices in Options Trading

When trading options, selecting the right strike price is crucial for determining the profitability and risk of a trade. Strike prices are categorized based on their relation to the current market price of the underlying asset. These categories help traders understand whether an option is likely to be profitable or not.

In this blog, we will explore the different types of strike prices, their significance, and how they impact trading strategies.

1. In-the-Money (ITM) Strike Price

An In-the-Money (ITM) strike price refers to an option that already holds intrinsic value. This means that if the option were exercised immediately, it would result in a profit.

• For Call Options: A call option is ITM if the strike price is lower than the current market price of the asset.
• For Put Options: A put option is ITM if the strike price is higher than the current market price of the asset.

Example:

If a stock is trading at ₹1,000:

• A ₹950 call option is ITM (because you can buy at ₹950 while the market price is ₹1,000).
• A ₹1,050 put option is ITM (because you can sell at ₹1,050 when the market price is only ₹1,000).

Pros of ITM Options:

• Higher chances of profit as they already have intrinsic value.
• Less impact from time decay compared to out-of-the-money options.

Cons of ITM Options:

• Premiums are higher, making them more expensive.
• Limited percentage gains compared to OTM options.

2. At-the-Money (ATM) Strike Price

An At-the-Money (ATM) strike price is when the strike price is equal to or very close to the current market price of the underlying asset.

• For Call and Put Options: The option is ATM when the strike price is almost the same as the current market price.

Example:

If a stock is trading at ₹1,000, then a ₹1,000 call or put option is considered ATM.

Pros of ATM Options:

• Balanced risk and reward.
• Moderately priced compared to ITM options.
• Responds well to price movement, making it a good choice for short-term traders.

Cons of ATM Options:

• Time decay affects ATM options more significantly than ITM options.
• Needs a decent price movement to turn profitable.

3. Out-of-the-Money (OTM) Strike Price

An Out-of-the-Money (OTM) strike price means the option has no intrinsic value and would result in a loss if exercised immediately. OTM options rely purely on future price movement to become profitable.

• For Call Options: A call option is OTM if the strike price is higher than the current market price.
• For Put Options: A put option is OTM if the strike price is lower than the current market price.

Example:

If a stock is trading at ₹1,000:

• A ₹1,050 call option is OTM (because buying at ₹1,050 when the market is at ₹1,000 makes no sense).
• A ₹950 put option is OTM (because selling at ₹950 when the market is at ₹1,000 is a bad deal).

Pros of OTM Options:

• Low premium cost, making them attractive for small traders.
• High reward potential if the market moves favourably.

Cons of OTM Options:

• High risk of expiring worthless.
• Highly impacted by time decay, losing value quickly.

4. Deep In-the-Money (Deep ITM) Strike Price

A Deep In-the-Money (Deep ITM) strike price refers to an option that is significantly ITM, meaning its intrinsic value is very high.

• For Call Options: A deep ITM call has a strike price much lower than the current market price.
• For Put Options: A deep ITM put has a strike price much higher than the current market price.

Example:

If a stock is trading at ₹1,000:

• A ₹800 call option is deep ITM.
• A ₹1,200 put option is deep ITM.

Pros of Deep ITM Options:

• Very low risk as they have significant intrinsic value.
• Less impact from time decay.

Cons of Deep ITM Options:

• Extremely expensive premiums.
• Limited percentage gains.

5. Deep Out-of-the-Money (Deep OTM) Strike Price

A Deep Out-of-the-Money (Deep OTM) strike price is an option that is far from the current market price, making it highly unlikely to become profitable unless there is a strong price movement.

• For Call Options: A deep OTM call has a strike price much higher than the current market price.
• For Put Options: A deep OTM put has a strike price much lower than the current market price.

Example:

If a stock is trading at ₹1,000:

• A ₹1,200 call option is deep OTM.
• A ₹800 put option is deep OTM.

Pros of Deep OTM Options:

• Extremely cheap premiums.
• High reward potential if the market moves drastically in the right direction.

Cons of Deep OTM Options:

• Extremely high risk of expiring worthless.
• Strongly affected by time decay.

Common Mistakes Traders Make When Choosing a Strike Price

Even experienced traders make mistakes when picking strike prices. Here are some common errors to avoid:

1. Choosing Deep OTM Options Without Market Confirmation
   • Many beginners buy deep OTM options hoping for big gains, but they often expire worthless.
2. Ignoring Market Trends and News
   • Always check technical levels, market trends, and news before selecting your strike price.
3. Not Considering Time Decay
   • Options lose value as expiry nears. Buying OTM options close to expiry is a highly risky strategy.
4. Overlooking Liquidity
   • Some strike prices have low liquidity, making it harder to buy or sell at a fair price.

Final Thoughts

The strike price is one of the most critical elements in options trading. Whether you are a beginner or an experienced trader, choosing the right strike price can maximize profits and minimize risks.

Here’s a quick summary to help you make better decisions:
If you want safer trades, choose ITM options.
If you are looking for high rewards with high risk, go for OTM options.
For a balance of risk and reward, ATM options are a good choice.

Understanding strike prices is just the beginning. Successful options trading requires continuous learning, market observation, and strategy refinement.