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What is the meaning of the term ‘strike price’?

The term ‘strike price’ refers to the predetermined price at which an option contract allows the buyer to either buy or sell the underlying asset. This fixed price is agreed upon when the contract is established and remains constant throughout the contract’s duration.

For call options, the strike price is the value at which the buyer has the right to purchase the underlying asset, while for put options, it’s the price at which the buyer has the right to sell the asset.

The strike price plays a pivotal role in determining an option’s profitability. If the market price of the underlying asset exceeds the strike price (for call options) or falls below the strike price (for put options) by the contract’s expiration, the option is considered ‘in-the-money’ (ITM) and holds intrinsic value. Conversely, if the market price doesn’t favourably fluctuate, the option may expire ‘out-of-the-money’ (OTM), rendering it worthless. To know more about ITM and OTM click here. What is the meaning of the terms ITM, ATM and OTM?