What Is a Strike Price?

The strike price (or exercise price) is the predetermined price at which the underlying asset—such as a stock, ETF, or index—can be bought (in the case of a call option) or sold (in the case of a put option) by the option holder. It essentially defines the terms of the contract.

The relationship between the current market price of the asset and the strike price significantly impacts the value of the option:

• In-the-money (ITM) options have intrinsic value. For a call, the strike is below the current price; for a put, it’s above. These options are more expensive because they can already be exercised profitably.

• At-the-money (ATM) options have strike prices near the current market price and often have the highest time value.

• Out-of-the-money (OTM) options have no intrinsic value but still cost money due to their potential. They are cheaper but riskier.

Generally, the closer the stock’s price is to the strike, the more sensitive the option’s price is to changes in the stock’s price—this sensitivity is known as delta.

What Is an Expiration Date?

The expiration date is the last day on which the option can be exercised. After this date, the contract ceases to exist and becomes worthless if not exercised. This adds a time dimension to the trade, which introduces an important concept: time decay, or theta.

Time decay works against option buyers:

• Short-term options lose value more quickly, especially in the final 30 days before expiration.

• Long-term options (like LEAPS—Long-Term Equity Anticipation Securities) decay more slowly and retain value better over time.

Options lose their time value as they approach expiration, so traders must be mindful of how long they plan to hold a position and how that affects potential profitability.

Choosing the Right Strike and Expiration

Your selection of strike price and expiration should align with your market outlook, risk tolerance, and trading objectives:

• Aggressive or speculative traders often favor OTM options with near-term expirations, aiming for high reward from a significant move in the stock. While the potential profit is high, the chance of expiring worthless is also much greater.

• Conservative traders may lean toward ITM options with longer expiration periods, prioritizing higher probability outcomes with lower overall risk. These positions are more expensive but provide more consistent performance if the market moves as expected.

In some strategies, such as spreads or covered calls, the selection of multiple strike prices and expiration dates adds another layer of complexity and flexibility.

Key Takeaway:
Understanding and choosing the right strike price and expiration date is not just a technical detail  – it is the foundation of every options strategy. It affects your potential profit, loss, risk exposure, and time sensitivity. Always align these choices with your trading plan, market view, and personal risk profile to improve your chances of success in the options market.