Strike price

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In options, the strike price, or exercise price, is a key variable in a derivatives contract between two parties. Where the contract requires delivery of the underlying instrument, the trade will be at the strike price, regardless of the spot price (market price) of the underlying instrument at that time.

Definition - The fixed price at which the owner of an option can purchase, in the case of a call, or sell, in the case of a put, the underlying security or commodity.

Contents

[edit] Moneyness

Moneyness is a term describing the relationship between the strike price of an option and the current trading price of its underlying security. Where settlement is financial, the difference between the strike price and the spot price will determine the value, or "moneyness", of the contract.

In options trading, terms such as in-the-money, at-the-money and out-of-the-money describe the moneyness of options.

[edit] Mathematical Formulae

A call option has positive monetary value when the underlying has a spot price (S) above the strike price (K). Since the option will not be exercised unless it is "in-the-money", the payoff for a call option is

max\left[(S-K);0\right]

also written as

(S-K)^{+} \

where

(x)^+ =\{^{x\ \ x\geq0}_{0\ \ x<0}

A put option has positive monetary value when the underlying has a spot price below the strike price; it is "out-the-money" otherwise, and will not be exercised. The payoff is therefore

max\left[(K-S);0\right]

or

(K-S)^{+} \

For a digital option payoff is 1_{S\geq K}, where 1{} is the indicator function.

[edit] See also

[edit] References

  • McMillan, Lawrence G. (2002). Options as a Strategic Investment, 4th ed., New York : New York Institute of Finance. ISBN 0-7352-0197-8. 
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