The strike price or strike In English, it is the price at which a financial asset is bought or sold (generally a financial option), and which is already defined by the issuer of this option.
The exercise price is, therefore, the one at which we agree to buy or sell an asset. For example, if we buy a call option at strike 70 dollars, it means that if we exercise our option to buy, we will do so at that price.
Determinants of Strike Price
The strike price is compared to the market price and will be the inflection point from which the investor will see the value of the option. In this way, the investor will not generate profits until he plays an addition or subtraction game (depending on whether it is a long position or a short position) from the strike to the premium or the cost paid for that option. This profit barrier is called break even and it is the threshold from which the investor will begin to make profits.
Therefore, it will be very important to see if the option is found (ITM, ATM, OTM), since the price of the premium will vary considerably depending on these variables.
- In the money.
- At the money.
- Out of the money.
In turn, the issuer can offer different strikes at different prices and it will be the investor who decides which of them is of their convenience.
Strike Price Example (Srike)
Suppose 1 Call contract on the Telefónica company with a strike price of 9.70 euros and a premium of 0.50 euros per option. Let's imagine, in turn, that Telefónica's share is trading at 9.50 euros. The investor decides to buy the call, but his break even or his threshold from which he will not begin to make profits will not be until he reaches the following level:
BreakEven = 9.70 + 0.50 = € 10.20
We must bear in mind that to the strike price we must add the premium paid, that is, 9.70 plus 0.50 euros, making a total of 10.20 euros. Remember that the share is trading at 9.50 euros. Therefore, the investor is far from his break even, perhaps it would not be a good option to have bought the call option.
Tags: ranking right finance