Alternatively, the lower the probability suggested by Delta, the less expensive the option will be. Intuitively, the greater the probability suggested by delta, the more expensive the option will be. A delta of 0.70 also implies a 70% probability that the option will be in the money at expiration. If the delta is 0.70 for a specific options contract, for instance, each $1 move by the underlying stock is anticipated to result in a $0.70 move in the option's price. When it comes to selecting the strike price, here’s how you might use Delta.ĭelta ranges from -1 to +1. One Greek in particular that can help you pick the strike price is delta, which measures an option’s sensitivity to the underlying stock price.ĭelta can be used in several ways when constructing your options strategy. Greeks are mathematical calculations designed to measure the impact of various factors-such as volatility and the time to expiration, on the price behavior of options. One tool that can help you get set up in the right lane with the optimal strike price is the option’s Greeks. While choosing the “right” strike price does not ensure that you will make a profit, it may increase your chances of success. Fortunately, there are tools to help you make this critical decision. 1īut when you are deciding which option to buy, how are you to know if the $50 strike price was the best one for your strategy? If the stock was trading at $50 at the time you were deciding to buy a call option, there might be options with strike prices of 30, 35, 40, 45, 50, 55, 60, 65, 70, and more. This is calculated as the $60 stock price minus the $50 option strike price minus the $3 purchase price, times 100 (because each options contract covers 100 shares of the underlying stock). Your profit, before taxes and transaction costs, would be $700. Suppose you purchased one XYZ 50 call option for $3 (i.e., the premium or cost of the option), and exercised it after the underlying stock had risen to $60. In this example, $50 is the strike price (this can also be known as the exercise price), XYZ is the stock, and call is the type of option (as opposed to a put, which grants the buyer the right to sell the stock at a predetermined price).Īssuming a stock were trading at $60, if you had purchased a call option on that stock with a strike price of $50, you would be able to exercise that option and purchase the stock at $50, even though the stock was trading at $60. For put options, the strike price is the price at which shares can be sold.įor instance, one XYZ 50 call option would grant the owner the right to buy 100 shares of XYZ stock at $50, regardless of what the current market price is. Picking your options strike price boils down to a couple of key decisions, such as: What price do you think the underlying stock will move to over a certain period of time and what price are you willing to pay or receive for buying or selling an options contract? To help answer these questions, consider options Greeks and a probability calculator.įor call options, the strike price is the price at which an underlying stock can be bought. This is because a call option is valuable as long as the buyer can purchase the underlying stock/index at a price less than the market price.Are you an experienced investor who is considering buying or selling options? If so, selecting the strike price is one of the most critical decisions to make.

The intrinsic value of a call option is the maximum of zero and the difference between the spot price and strike price, that is, Max (0, Sp-St). INTRINSIC VALUE OF AN OPTION: It is defined as the amount by which an option is an ITM. This is because a call buyer purchases the stock at a price higher than the market price and a put buyer sells at a price lower than the market price. If the OTM option is exercised, it leads to a negative cash flow for the buyer.

An OTM put option is one where the strike price is less than the spot price, that is, the market price of the underlying security is more than the strike price. OUT OF THE MONEY (OTM) OPTION: An OTM call option is one where the strike price is more than the spot price. There is no cash flow for the call and put buyers if they exercise the at the money option. AT THE MONEY (ATM) OPTION: The ATM call and put options are ones where the strike price is equal to the market or spot price.

Strike price