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Underlying Price & Strike Price

The underlying price and strike price are two important terms in options trading that play a significant role in determining the value of an option.

The underlying price refers to the current market price of the asset on which the option contract is based. This asset can be a stock, commodity, currency, or any other financial instrument.

The strike price, on the other hand, is the price at which the buyer of the option has the right to buy or sell the underlying asset. This is also known as the exercise price. The strike price is set at the time the option contract is created and remains fixed until the option expires.

The difference between the underlying price and the strike price is a key factor in determining the value of the option. In the case of a call option, if the underlying price is higher than the strike price, the option is in-the-money (ITM). This means that the buyer of the option can purchase the asset at a lower price than its current market value. In contrast, if the underlying price is lower than the strike price, the option is out-of-the-money (OTM) and the buyer would not exercise their right to buy the asset at a higher price.

For a put option, the opposite is true. If the underlying price is lower than the strike price, the option is in-the-money and the buyer of the option has the right to sell the asset at a higher price than its current market value. If the underlying price is higher than the strike price, the option is out-of-the-money and the buyer would not exercise their right to sell the asset at a lower price.

In summary, the underlying price is the current market price of the asset on which the option is based, while the strike price is the price at which the buyer of the option has the right to buy or sell the underlying asset. The difference between the underlying price and the strike price is an important factor in determining the value of the option.