In Option trading, what does 'Strike price' mean?

By Research Desk
about 3 years ago

Strike price, also known as ‘exercise price’ is used for the option segment of the derivatives market. Strike price is the price at which a specific derivative contract can be exercised. For call options, it is the price at which the security can be bought, while for put options, the strike price is the price at which shares can be sold.
 

The strike prices are fixed in the contract and it is used for stock as well as index options. Nifty 7700 June CE has strike price of 7700 while TCS July 1600 PE has strike price of 1600.

 

The difference between underlying stock’s current market price and option's strike price represents profit gained upon the exercise or the sale of the option. Thus, the concept of strike price is limited to options and not for futures.

 

Strike prices of Indian stocks were, till recently, based on denomination of the stock. For example, stocks with denominations between 1 to 50 had stock options with strike price intervals of Rs. 2.5, while stocks with denomination between 51-100 had stock options with strike price intervals of Rs. 5, stocks denominated between 101 to 250 has Rs. 10 interval for different contacts in options and stocks with market price above Rs. 251 had their options contract at strike price intervals of Rs. 20. However, from 1st April 2013, NSE has introduced options contract based on volatility of the underlying stock, replacing the stock denomination concept. This new measure is likely to increase trading volumes in less volatile options which will now have more strikes.

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