What is a Strike Price?

Understanding strike prices is one of the fundamental steps in investing with options. The strike price is the price at which an option can be exercised by its holder (owner). If a call option on shares of XYZ has a strike price of $20, the option owner can buy XYZ at the strike price ($20 throughout the life of the contract), no matter how high the price of XYZ stock goes in the market. Alternately, the owner could possibly sell the call option instead, as long as it hasn't expired.

With a put option, the strike price again represents the price at which an option can be exercised by the investor who owns it. However, a put option provides its owner the right to sell the underlying security at the strike price to a put seller. As with calls, a put option can typically be sold any time before it expires. When a call option's underlying security is above its strike price or a put option's underlying security is below its strike price, this is known as being in-the-money. An option whose underlying has not gotten to its strike price is out-of-the-money.