The Unlucky Investor's Guide to Options Trading guides readers through the world of options and teaches the crucial risk management techniques for sustainable investing.
What is an Option's Strike Price?
A strike price is the price in which we choose to become long or short stock using an option. Unlike stock where we’re forced to trade the current price, we can choose different option strikes that are above or below the stock price, that have different premium values and probabilities of profit. When choosing strikes, there are a few crucial concepts: The probability of the option expiring worthless, and whether the option is in the money (ITM), at the money (ATM) or out of the money (OTM).
Extrinsic & Intrinsic Value
Extrinsic value is time & volatility value. This is affected by time until expiration, and implied volatility. All options have some level of extrinsic value as long as there is time left until the expiration of the option.
Intrinsic value is real value at expiration. If the strike allows the option owner to buy shares at a discount (calls), or sell shares at a higher price than the market (puts), the option will have intrinsic value and be considered to be in the money. Calls that are below the stock price have intrinsic value. Puts that are above the stock price have intrinsic value.
Out of the Money Strikes
In the Money Strikes
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