Open an Account
Trade Now
  • Markets
  • Products
  • Research
  • Partner with us
  • Blog
  • Refer A Friend
Open an Account
Trade Now
  • Markets
  • Products
  • Research
  • Partner with us
  • Blog
  • Refer A Friend
Home » Blog » Stock Market » Strike Price in Options: What to Know
Religare Broking by Religare Broking
April 17, 2024
in Stock Market
0

Strike Price in Options: What to Know

FMCG Sector Stocks to invest in 2025
  • Last Updated: Apr 17,2024 |
  • Religare Broking

In options trading, the concept of strike price plays a crucial role. The strike price, also known as the exercise price, serves as a reference point to determine the profitability and risk associated with an options trade. The significance of the strike price lies in its ability to determine whether an options contract is in-the-money, at-the-money, or out-of-the-money.

Understanding the strike price is vital for traders as it directly influences the potential gains or losses they can achieve in the options market. Let’s explore more.

    Topics Covered:

  • What is the Strike Price in Options?
  • Example of Strike Price in Options Trade
  • Strike Price of a Put Option
  • Factors Determining the Strike Price: Market Conditions
  • Strike Price vs Exercise Price
  • Conclusion

What is the Strike Price in Options?

So, what essentially is strike price meaning? The strike price in options trading refers to the predetermined price at which the underlying asset can be bought or sold when exercising an options contract. It is a crucial reference point in determining the profitability and risk associated with an options trade.

When trading options, it is essential to understand the strike price as it directly impacts the trade outcome. The strike price determines whether an options contract is in-the-money, at-the-money, or out-of-the-money, which determines the potential gains or losses for the trader.

The strike price plays a significant role in options trading as it allows traders to make strategic decisions regarding risk management and optimise their trading outcomes based on market expectations.

Example of Strike Price in Options Trade

To understand how strike price functions in an actual options trade scenario within the Indian market, let's consider a hypothetical example: Reliance Tech Ltd.

Imagine that Reliance Tech Ltd is trading at ₹100 per share, and you are optimistic about its future performance. You buy a call option contract for Reliance Tech with a strike price of ₹110, expiring in one month. This contract gives you the right, but not the obligation, to purchase 100 shares of Reliance Tech at ₹110 per share within the next month.

For this option, you pay a premium of ₹5 per share, amounting to a total of ₹500. Now, let’s explore the possible outcomes at the contract’s expiration.

Must Read: Meaning of Demat Account

Scenario 1: Stock Price Above Strike Price

If Reliance Tech's stock rises to ₹120 by expiration, your call option is in-the-money. You can exercise the option to buy shares at ₹110 each, though they’re now worth ₹120 in the market. Exercising the option would yield a profit of ₹1,000 (₹120 - ₹110 per share) minus the ₹500 premium, netting ₹500.

Scenario 2: Stock Price Equals Strike Price

Should Reliance Tech's stock be precisely ₹110 at expiration, your option is at-the-money. You can either exercise the option or let it expire. Exercising it means you break even, as the gain from the stock is offset by the premium you paid.

Read Also: What is a Call Option

Scenario 3: Stock Price Below Strike Price

If Reliance Tech's stock falls to ₹100 or lower at expiration, your option is out of the money. It's unprofitable to exercise the option, as buying shares in the open market would be cheaper. In this case, you'd likely let the option expire, resulting in a loss of the ₹500 premium.

This example shows the pivotal role of the strike price in options trading within the Indian market. Choosing a strike price aligned with your market predictions allows you to maximise potential gains and manage risks effectively in options trading.

Strike Price of a Put Option

When determining the strike price, several factors come into play. Firstly, the strike price is typically set based on the current market price of the underlying asset. This gives the buyer a clear reference point for potential profit or loss. The strike price should also be carefully chosen to align with the buyer's expectations of the underlying asset's price movement.

Strategic considerations are crucial in selecting an appropriate strike price for put options. One strategy is to choose a strike price below the underlying asset's current market price. This is an "in-the-money" put option, providing immediate intrinsic value. It offers protection against potential downside risk and allows for potential profit if the price of the underlying asset decreases.

On the other hand, selecting a strike price above the current market price, known as an "out-of-the-money" put option, allows for potential profit if the price of the underlying asset decreases significantly. However, the underlying asset must decline enough to cover the premium paid for the put option and any transaction costs.

Another strategic consideration is the time remaining until the option's expiration date. As time passes, the value of the put option may change, and the strike price should be selected based on the buyer's anticipated price movement within that time frame.

Factors Determining the Strike Price: Market Conditions

Market conditions are an important factor to consider when determining the strike price of an option. The current state of the market, including factors such as economic indicators, industry trends, and overall investor sentiment, can greatly influence the choice of strike price. 

In a bearish market, where prices are expected to decline, a lower strike price may be selected to maximise potential profit from the downward movement. Conversely, a higher strike price may be chosen to capture potential gains in a bullish market, where prices are expected to rise. 

Another significant factor that affects the determination of the strike price is market volatility. It refers to the degree of price fluctuations in the underlying asset. Higher volatility can lead to larger price movements and increased potential for both profits and losses. 

When volatility is high, option buyers may opt for a strike price that is further out of the money to capitalise on potential market swings. On the other hand, in periods of low volatility, option buyers may choose to strike prices closer to the current market price for a higher probability of profit.

Strike Price vs Exercise Price

In options trading, strike price and exercise price are two terms commonly used, but they differ in their specific meaning and application.

The strike price, also known as the exercise price, represents the predetermined price at which the underlying asset can be bought or sold. It is set when the option contract is created and remains constant throughout the option's life.

On the other hand, the exercise price refers specifically to the price at which the option holder can exercise their right to buy or sell the underlying asset. While they are often used interchangeably, it is important to note that the strike price is used more generally, while the exercise price is specific to exercising the option.

Recommended Read : Understanding Options Trading

Despite these differences, strike and exercise prices play a crucial role in options trading, determining the potential profitability and risk associated with the options contract. 

Conclusion

To effectively navigate options trading, one must comprehensively understand various crucial elements. Among these, the strike price holds significant importance. Throughout our exploration of strike and exercise prices, we have recognised that the strike price acts as a fundamental reference point for options traders. By developing this knowledge, investors can enhance their ability to make strategic choices and navigate the dynamic landscape of options trading with confidence and precision.

Open Demat Account Today and Start Trading with Confidence!

Navigate Stock Market Trends & Invest with Precision

Open Stock Trading Account
Religare Broking

Religare Broking

Religare Broking: Online Trading of Stocks, Commodities and Mutual Funds in India

Related Posts

Top ETFs In India
Stock Market

Top ETFs In India

May 16,2025

Top Gold ETFs in India
Stock Market

Top Gold ETFs in India

May 16,2025

Highest Dividend Yield Stocks In India
Stock Market

Highest Dividend Yield Stocks In India

May 16,2025

Lessons from legendary investor Warren Buffet
Stock Market

Lessons from Legendary Investors: What We Can Learn from Warren Buffett and Others

May 07,2025

Analysing the Impact of Interest Rates on Stock Market
Stock Market

Analysing the Impact of Interest Rates on Stock Market

May 07,2025

Building an Emergency Fund: The Foundation of Financial Security
Stock Market

Building an Emergency Fund: The Foundation of Financial Security

May 07,2025

Disclaimer:This blog is written exclusively for educational purpose. Any stock mentions in the blog are examples and not recommendations. Please refer to our research reports or analyst recommendations for stock ideas.

No Result
View All Result

Open a Free Demat & Trading Account

Please enter valid name
Please enter valid phone

Category

  • Currency Trading (4)
  • TradingView (2)
  • Margin Trading (2)
  • National Pension Scheme (2)
  • Algo Trading (2)
  • Income Tax (1)
  • Commodity Trading (16)
  • Saving Schemes (12)
  • Derivatives Trading (80)
  • Stock Market (166)
  • Online Share Trading (103)
  • Demat Account (38)
  • Mutual Funds (45)
  • IPO (26)
  • Indian Market & Economy (8)
  • Income Tax (15)
  • Uncategorized (1)

Popular Blogs

What are the Major Types of Trade in the Indian Stock Market?
Debt-to-Equity Ratio: A Comprehensive Guide
What is Relative Strength Index (RSI)?
What Are Shares?
Understanding the Concept of NISM Certifications

Latest Blogs

Top ETFs In India
Top Gold ETFs in India
Highest Dividend Yield Stocks In India
What Are the Best Swing Trading Strategies?
Option Trading Strategies for Experienced Traders in 2025
Top Risk Management Techniques for Active Traders
How to Select Stocks for Swing Trading
Scalping vs Day Trading: Which Strategy is Best for Fast Gains?
IPO GMP – Latest IPO Grey Market Premium
Stock Market for Beginners: Ten Great Ways to Learn Stock Trading
Learn More About Stock Market


Markets

  • Stock Market Live
  • Derivatives
  • Commodities
  • Currency
  • Upcoming IPO
  • Listed IPO

Products

  • Overview
  • Equity
  • Derivatives
  • Commodities
  • Currency
  • Margin Trading Facility
  • IPO
  • IPO GMP

Services

  • Tin FC
  • NPS
  • DSC
  • Open Demat Account
  • Open Trading Account

Research

  • Investment Ideas
  • Trading Calls
  • Research Reports
  • Blog
  • Knowledge Centre
  • Stock Market Holidays
  • NSE Holidays
  • BSE Holidays

Support

  • Contact Us
  • Locate Us
  • Downloads
  • Margin Calculator
  • Margin Matrix
  • Feedback
  • Activation Key
  • Demat Account FAQs
  • Trading Account FAQs
  • About Us
  • Notification
  • Disclaimer
  • Privacy Policy
  • Terms Conditions
  • Rules Regulations
  • Corporate Information
  • Educational Note For Clients On PMLA
  • Partner with Us
Important Links
  • NSE
  • BSE
  • SEBI
  • MCX
  • NCDEX
  • MSEI
  • NSEL
  • IRRA
Investor Complaints
  • NSE
  • BSE
  • MCX
  • SEBI
  • SEBI SCORES
  • NCDEX
  • MSEI
  • SMARTODR
E-Voting Facility
  • NSDL
  • CDSL
Upcoming IPO
  • OYO IPO
  • Yatra Online IPO
  • Ixigo IPO

Unified Portal Version No.1.0.0.2

Copyright 2010 Religare. Trademarks are the property of their respective owners. All rights reserved. Religare Broking Limited (CIN: U65999DL2016PLC314319), Registered Office: 802-815B, 8th Floor, Gopal Das Bhawan, 28-Barakhamba Road, Connaught Place, New Delhi -110001
Telephone No.: +91-011-49871213 | Fax: +91-011-49871189
E-mail: wecare@religareonline.com

Member Religare Broking Limited (RBL) : SEBI Regn. No. INZ000174330 NSE CM, F&O, CD TM Code: 06537 Clearing Member (F&O) No. M50235; BSE CM, F&O, CD, CO Code: 3004 Clearing No: 3004; MSEI CM, F&O, CD, TM Code: 1051 | MCX Membership No. 56560 | NCDEX Membership No. 01276 | AMFI-registered Mutual Fund Distributor ARN No.139809.

Member Religare Commodities Limited (RCL) : Regn No. MCX 10575 | NCDEX 00109|NeML 10042|NSEL 10180 |SEBI Registration No. MCX/NCDEX :INZ000022334.

Depository Participant : Religare Broking Limited (RBL) - NSDL: DP ID: IN 301774 | SEBI Regn. No: IN-DP-385-2018 | CDSL DP ID: 30200 | SEBI Regn. No: IN-DP-385-2018

Religare Broking Limited(RBL) : Research Analyst SEBI Regi. No : INH100006977

Religare Broking Limited(RBL) : Registrars to an issue and share Transfer Agents (RTA) - SEBI Regi. No : INR000004361

Religare Broking Limited(RBL) : Corporate Agent (Composite) - IRDA Regi. No : CA0581

Religare Broking Limited(RBL) : National Pension System - Point of Presence (NPS-POP) - PFRDA Regi. No : POP01092018

Advisory for Investors

  • Investor Charter Stock Broker
  • Investor Charter Research Analyst
  • Investor Charter of Depository Participant
  • Advisory KYC Compliance
  • Investor Charter of Registrars to an issue and share Transfer Agents (RTA)
  • For Reporting of Cyber attack/incident Click here..!!
  • Details of Client Bank Accounts of Religare Broking Limited
  • How to Link Your Aadhaar Number with Demat Account
  • How to link Aadhaar Card with your PAN Card
  • How to Open a Demat & Trading Account Online
  • Member Details
  • SOP - Centralized mechanism for reporting the demise of an investor through KRAs
  • SEBI Investor Website
  • Quiz-NFL-Banner

ATTENTION INVESTOR

-- Stock Brokers can accept securities as margin from clients only by way of pledge in the depository system w.e.f. September 1, 2020.

-- Update your mobile number & email Id with your stock broker/depository participant and receive OTP directly from depository on your email id and/or mobile number to create pledge.

-- 20% upfront margin of the transaction value to trade in cash market segment.

-- Investors may please refer to the Exchange's Frequently Asked Questions (FAQs) issued vide circular reference NSE/INSP/45191 dated July 31, 2020 and NSE/INSP/45534 dated August 31, 2020 and other guidelines issued from time to time in this regard.

-- Check your Securities /MF/ Bonds in the consolidated account statement issued by NSDL/CDSL every month.

-- Prevent unauthorized transactions in your account - Update your mobile numbers/email IDs with your stock brokers. Receive information of your transactions directly from Exchange on your mobile/email at the end of the day - Issued in the interest of Investors.

-- Prevent Unauthorized Transactions in your demat account Update your Mobile Number with your Depository Participant. Receive alerts on your Registered Mobile for all debit and other important transactions in your demat account directly from Depository (NSDL/CDSL) on the same day issued in the interest of investors.

--If you have any grievance you may reach Religare Broking Limited at igreligare@religare.com & Religare Commodities Limited at ig.commodities@religare.com.
If the complaint does not get redressed within 30 days, the complainant may use SCORES to submit the grievance.

--Filing complaint on SEBI SCORES – Easy & quick
a. Register on SCORES portal.
b. Mandatory details for filing complaints on SCORES - Name, PAN, Address, Mobile Number, E-mail ID.
c. Benefits - Effective Communication & speedy redressal of the grievances

-- No need to issue cheques by investors while subscribing to IPO. Just write the bank account number and sign in the application form to authorise your bank to make payment in case of allotment. No worries for refund as the money remains in investors account.

-- KYC is one time exercise while dealing in securities markets - once KYC is done through a SEBI registered intermediary (broker, DP, Mutual Fund etc.), you need not undergo the same process again when you approach another intermediary.

-- Trading and Demat Accounts opened under Insta Plan will not be eligible for dealing through branches.

-- Please note that by submitting your mobile and email on our website, you are authorizing us to Call/SMS/Whtsapp/RCS/Email you even though you may be registered under DNC. We shall Call/SMS you for a period of 12 months.

No Result
View All Result
  • Products
  • Research
  • Career
  • Partner with us

© 2021 RELIGARE -Designed By Religare.

Open Demat Account
Please enter valid name
Please enter valid phone

Open a FREE Demat
& Trading Account

Invest in Stocks, IPOs, F&O &
Mutual Funds

Please enter valid name
Please enter valid phone
religare logo

Get better recommendations, Make better investments.

Daily Stock Suggestions from Leading Experts!

By signing up, you agree to receive updates on SMS, Email & WhatsApp