Definition
Strike Price
The predetermined price at which an option holder can buy (call) or sell (put) the underlying security if they exercise the option. Set when the contract is created and remains fixed throughout the option's life, except that it may be adjusted for certain corporate events such as stock splits. The relationship between strike price and current market price determines intrinsic value and whether the option is in-the-money, at-the-money, or out-of-the-money.
An investor buys a call option on XYZ stock with a $50 strike price when the stock is trading at $48. If XYZ rises to $60, the call is in-the-money and has $10 of intrinsic value ($60 market - $50 strike). The holder can exercise the right to buy shares at $50 regardless of the current $60 market price. Conversely, if an investor buys a put option with a $40 strike when the stock is at $45, and the stock falls to $35, the put is in-the-money with $5 intrinsic value ($40 strike - $35 market), allowing the holder to sell at $40.
Students often confuse strike price with market price (strike is fixed, market price fluctuates), or with the option premium (the cost to buy the option). Another common error is not understanding how strike price determines intrinsic value: for calls, intrinsic value = market price - strike price (when positive); for puts, intrinsic value = strike price - market price (when positive). Many also forget that strike price remains constant (apart from adjustments for corporate events such as stock splits) while the underlying security's price changes, which is what creates profit opportunities.
How is Strike Price tested on the exam?
- Calculating intrinsic value of options using strike price versus current market price
- Determining whether an option is in-the-money, at-the-money, or out-of-the-money based on strike price
- Computing breakeven points for option positions using strike price and premium
- Understanding how strike price selection affects option cost, risk, and probability of profit
- Identifying which strike prices provide profit at expiration given a specific market price scenario
Regulatory limits
Regulatory Limits
| Description | Limit | Notes |
|---|---|---|
| Strike price intervals for stocks $25-$200 | $5 increments | Traditional standard interval; exchange programs (such as $1 strikes and short-term series) list narrower strikes on many classes |
| Strike price intervals for stocks under $25 | $2.50 increments | Traditional standard interval; $1 and $0.50 intervals are common under exchange strike programs |
| Strike price intervals for stocks over $200 | $10 increments | Traditional standard interval; exchange rules permit narrower intervals in some series |
Think of strike price as the "price tag set when the contract is made." It stays fixed for the life of the contract, like a coupon with a fixed discount, unless OCC adjusts it for a corporate event such as a stock split. For calls: the call is in-the-money when the market strikes up above the strike. For puts: the put is in-the-money when the market strikes down below the strike. Intrinsic value = how far in-the-money (market vs. strike difference).
Practice questions
Test your understanding with the questions below. Pick an answer to reveal the explanation.
Maria owns a call option on ABC stock with a strike price of $75. ABC is currently trading at $82 per share. A put option on the same stock with a $70 strike price is also available. Which statement accurately describes the current status of these options?
A is correct. The call option is in-the-money because the market price ($82) exceeds the strike price ($75), giving it $7 of intrinsic value ($82 - $75 = $7). The put option is out-of-the-money because the market price ($82) is above the strike price ($70), so exercising the right to sell at $70 when the market is at $82 would result in a loss. Out-of-the-money options have zero intrinsic value.
B is incorrect because it reverses the relationships. A call is in-the-money when market > strike (which is true here), and a put is in-the-money when market < strike (which is false here since $82 > $70). C is incorrect because at-the-money means the market price equals the strike price, which is true for neither option ($82 ≠ $75 and $82 ≠ $70). D confuses strike price with intrinsic value. Intrinsic value is calculated from the relationship between strike and market price, not the strike price alone.
The Series 65 exam tests your ability to determine whether options have intrinsic value based on the relationship between strike price and market price. Understanding in-the-money, at-the-money, and out-of-the-money status is critical for evaluating option positions, exercise decisions, and profit/loss scenarios. This concept appears frequently in suitability and recommendation questions.
Which statement best describes the strike price of an option contract?
B is correct. The strike price (also called exercise price) is the predetermined, fixed price established when the option contract is created. It remains constant throughout the option's life (unless OCC adjusts the contract for a corporate event such as a stock split) and determines the price at which the holder can buy (call) or sell (put) the underlying security if they choose to exercise.
A is incorrect because the strike price and market price are distinct. When an option is purchased, the strike price may be above, below, or equal to the current market price, because the exchange lists a range of strikes at set intervals around the stock's price. C is incorrect because the strike price does not change with market conditions; it changes only if the contract is adjusted for certain corporate events, such as a stock split. While option premium (price of the option) changes based on market conditions, volatility, and time, the strike price is fixed. D confuses strike price with premium. The premium is the cost to buy the option; the strike price is the exercise price written into the contract.
The Series 65 exam tests your understanding that strike price is a fixed contractual term, not a variable. This distinction is fundamental to options mechanics and critical for analyzing how options gain or lose value as the underlying security's market price fluctuates. Understanding the difference between strike price, market price, and option premium is essential for option calculations and suitability analysis.
An investor holds a put option on DEF stock with a strike price of $90. DEF is currently trading at $78 per share. What is the intrinsic value of this put option?
B is correct. Calculate put option intrinsic value: Strike Price - Market Price = $90 - $78 = $12. The put option is in-the-money because the market price ($78) is below the strike price ($90), giving the holder the valuable right to sell at $90 when the market is only at $78. This $12 difference is the intrinsic value.
A is incorrect because this put is clearly in-the-money (market < strike for puts), not out-of-the-money. A put is only out-of-the-money when market price exceeds strike price. C ($78) is simply the current market price and has nothing to do with intrinsic value calculation. D ($90) is the strike price itself, not the intrinsic value. Intrinsic value is the amount by which the option is in the money, not the strike price alone.
The Series 65 exam frequently tests intrinsic value calculations using strike price. You must know the formulas: for calls, intrinsic value = market - strike (when market > strike); for puts, intrinsic value = strike - market (when strike > market). If the formula yields a negative number, intrinsic value is zero. This calculation is essential for determining option profitability and exercise decisions.
All of the following statements about strike price are accurate except
C is correct (the exception). This statement is false. The strike price does not move with the market. It is a fixed contractual term that changes only if the contract is adjusted for certain corporate events, such as a stock split, and never to track daily prices. This fixed nature is fundamental to how options work: the holder has the right to transact at the strike price no matter where the market moves.
A is accurate: the strike price is set at contract creation and changes only through adjustments for certain corporate events. This fixed exercise price is what gives options their leverage and profit potential as the underlying security's market price fluctuates. B is accurate: a call option gives the right to buy at the strike price, so it has value (is in-the-money) when the market price is higher than the strike price. D is accurate: exchanges standardize strike prices at regular intervals (traditionally $2.50, $5, or $10, with narrower intervals such as $1 under exchange programs) to create liquid, fungible option contracts.
The Series 65 exam tests your understanding that strike price is a fixed contractual term that does not move with the market. This is critical for understanding options mechanics, calculating intrinsic value, and analyzing how options gain or lose value. Many students incorrectly assume strike prices change with market conditions, when in fact only the option premium (price) changes while strike remains constant.
A call option on GHI stock has a strike price of $60, and GHI is currently trading at $68. The option premium is $10. Which of the following statements are accurate?
1. This call option is in-the-money with $8 of intrinsic value
2. The breakeven price at expiration is $70 ($60 strike + $10 premium)
3. If GHI rises to $75, the option would have $15 of intrinsic value
4. The option has $2 of time value ($10 premium - $8 intrinsic value)
D is correct. All four statements are accurate.
Statement 1 is true: The call is in-the-money because market price ($68) exceeds strike price ($60). Intrinsic value = $68 - $60 = $8.
Statement 2 is true: For a call option, breakeven at expiration = strike price + premium = $60 + $10 = $70. At $70, the $10 gain from exercise ($70 market - $60 strike) exactly offsets the $10 premium paid, resulting in breakeven.
Statement 3 is true: If GHI rises to $75, intrinsic value = market - strike = $75 - $60 = $15. Intrinsic value increases dollar-for-dollar as the underlying stock price rises when the option is in-the-money.
Statement 4 is true: Option premium consists of intrinsic value plus time value. Time value = premium - intrinsic value = $10 - $8 = $2. This $2 represents the market's valuation of the remaining time until expiration and the possibility of further price increases.
The Series 65 exam tests complete understanding of how strike price interacts with market price, premium, intrinsic value, time value, and breakeven calculations. You must be able to determine in-the-money status, calculate intrinsic value, compute breakeven, and understand how option premium breaks down into intrinsic and time value components. These multi-step questions require mastery of all strike price relationships.
What concepts relate to Strike Price?
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