Options traders use terms that are unique to options markets. These terms appear often and have a significant effect on the profitability of an options trade. A strike price is set for each option by the seller of the option, who is also called the writer.
When you buy a call option , the strike price is the price at which you can buy the underlying asset if you choose to utilize the option. In this case, you can also sell the call for a profit. The profit is approximately the difference between the underlying stock price and the strike price. When you buy a put option the strike price is the price at which you can sell the underlying asset.
In this case, you may also sell the put for a profit. The profit is approximately the difference between the strike price price and the underlying stock price. If buyer chooses to use that right then they are "exercising" the option. Exercising the option is beneficial if the underlying asset price is above the strike price of a call option, or the underlying asset price is below the strike price of a put option.
Traders don't need to exercise the option. Exercising an option is not an obligation. Most options are not exercised, even the profitable ones. The math is follows: These other factors are called greeks. The strike price is the same as the exercise price. Option contracts specify the expiration date as part of the contract specifications. For European style options, the expiration date is the only date that an in the money in profit options contract can be exercised.
This is because European style options can't be exercised, nor can the position be closed, before the expiration date. For US style options, the expiration date is the last date that an in the money options contract can be exercised. This is because US style options can be exercised, or bought or sold, on any day up to the expiration date.
Options contracts that are out of the money not in profit on the expiration date are not exercised, and expire worthless. Any premium paid for this option is forfeited. Options traders who have bought options contracts want their options to be in the money.
When a buyer's option expires worthless, that means the seller gets to keep the premium as a profit for writing the option. Edited by Cory Mitchell. Updated November 20, An Option's Strike Price A strike price is set for each option by the seller of the option, who is also called the writer.More...