What is strike price in call option?
The strike price in a call option refers to the predetermined price at which an underlying asset can be purchased by the option holder before the expiration date. It is also known as the exercise price. The strike price is a crucial element of options trading as it determines the profit potential and breakeven point of the call option.
When an investor purchases a call option, they are essentially buying the right to buy the underlying asset at the strike price. If the market price of the asset exceeds the strike price before the option’s expiration, the investor can exercise the option and profit from the price difference.
1. How does the strike price affect the profitability of a call option?
The strike price directly influences the profitability of a call option. The higher the strike price, the lower the potential profit if the market price of the asset increases. Conversely, a lower strike price offers greater profit potential.
2. What happens if the market price is below the strike price?
If the market price of the underlying asset is below the strike price, it is generally not profitable to exercise the call option. In such cases, it may be more beneficial for the option holder to let the option expire worthless.
3. Can the strike price be changed after purchasing a call option?
No, the strike price of a call option is fixed at the time of purchase and cannot be changed.
4. Are strike prices the same for all call options?
No, strike prices may vary for different call options. They are typically set at different levels to reflect the market’s expectations and the price range of the underlying asset.
5. What factors influence the choice of strike price?
The choice of strike price depends on various factors, including the investor’s risk tolerance, market outlook, and desired profit potential. Traders often consider the historical volatility, future price expectations, and time to expiration when selecting a strike price.
6. How do strike prices relate to option premiums?
The strike price affects the option premium, which is the price an investor pays to purchase the call option. Generally, as the strike price decreases, the option premium increases, assuming other factors remain constant.
7. What is the significance of the breakeven point in relation to the strike price?
The breakeven point is the market price at which an investor neither makes a profit nor incurs a loss. For call options, the breakeven point is the strike price plus the premium paid. It provides a reference point for the option holder to determine whether the investment is profitable.
8. Can the strike price of a call option be higher than the market price?
Although it is relatively uncommon, the strike price of a call option can be set higher than the market price of the underlying asset. This situation may arise if the option is purchased speculatively or if the strike price is based on anticipated future market movements.
9. What other types of options use strike prices?
Strike prices are not limited to call options; they are also used in put options. Put options give the holder the right to sell an underlying asset at the strike price before the option’s expiration.
10. How are strike prices determined in the options market?
Strike prices are determined by the options exchange based on various factors such as the prevailing market conditions, the price range of the underlying asset, and the demand for options contracts.
11. Can the strike price of a call option change over time?
No, the strike price remains fixed throughout the term of the option. However, new options contracts with different strike prices are regularly introduced in the market to align with changing market conditions.
12. Are strike prices negotiable?
No, strike prices are standardized and non-negotiable. Investors must select from the available strike prices offered by the options exchange.