Saturday, August 24th, 2019

Strike Prices and Spot Prices in Options Trading

November 24, 2009 by T.D. Thompson  
Filed under Options Trading Tips

 

If you are just getting interested in options trading you will need to learn a new set of terms. For starters options have a strike price which is also known as an exercise price and they have a spot price which is the market price when an option is exercised (at the strike or exercise price).

You can profit from options in two basic ways. You can sell call or put options and earn a premium which is what the buyer pays in order to have the option to buy (in the case of a call option) or sell (in the case of a put option). You can also buy call or put options and have the opportunity of earning the difference between the spot price and the strike price, minus the premium you paid to get that option.

In the case of selling call options you really do not want the market price or spot price to go up so that you can earn your premium and keep your stock. You risk in selling a call option is that the stock will double in value overnight and you will miss out. In the case of buying call options you want the stock to go up more than the premium you paid so that you can exercise you option and collect the difference between the strike price (exercise price) which is what you will pay and the spot price (market price) which is what the stock will now be worth. Remember, however, that the stock needs to go up more than the premium you paid and, if you are going to immediately sell the stock, more than the premium and the commissions you will pay.

If you are selling a put option then, as with selling a call option, you will earn a premium from the buyer. However, with a put option there is a potentially large risk. If the market price (the spot price) drops substantially below the strike price (exercise price) then the buyer will exercise the option and you will need to buy the stock at the now higher strike price or exercise price and either hold on to it or sell it for a loss at the now lower market price or spot price.

If you are buying a put option you pay the premium to protect your stock position at the strike price. If the stock goes well above the spot price (exercise price) you are happy and do not exercise the option. If the stock goes well below the spot price (exercise price) then you exercise the option and the seller of the put option buys your stock at the strike price (exercise price) instead of the, now, much lower spot price.

Assuming that you are learning the terminology, the strike price or exercise price is the price at which an options contract is exercised. The spot price is the market price when the term of the option contract expires.

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