Strike Price in Options Trading
- Understanding the concept of strike price in options
- How strike price relates to spot price
- Impact of strike price on option premium
- Role of strike price intervals
What is a Strike Price in Options?
In options trading, the strike price refers to the predefined rate at which the buyer has the right to buy (in a call option) or sell (in a put option) the underlying asset, within a set timeframe. It is also the price at which the contract can be exercised if the buyer chooses to do so.
This price is distinct from the spot price, which is the current market price of the asset in the cash or spot market. While the strike price is a fixed benchmark, the spot price fluctuates in real time and often influences the selection of the strike price.
Strike Price vs Spot Price
While the spot price represents the live trading price of the stock or index, the strike price is a reference price at which a contract may be executed in the future. The two are not the same, but the spot price plays an important role in shaping the premiums for option contracts.
In fact, the difference between strike and spot price is what gives rise to different types of option contracts in-the-money (ITM), at-the-money (ATM), and Out-of-the-Money (OTM).
How Strike Price Influences Option Premium
Strike price directly affects the premium of an option. Generally, for call options, the higher the strike price in relation to the spot price, the lower the premium. For put options, the reverse holds true—the higher the strike price, the higher the premium, assuming all else remains constant.
Example Snapshot: Nifty 50 Option Premiums (as of 16/08/2022)
| CALLS |
| PUTS |
|
VOLUME | LTP | STRIKE PRICE | LTP | VOLUME |
17,387 | 442 | 17,400.00 | 5.8 | 6,98,779 |
3,037 | 393.55 | 17,450.00 | 6.75 | 3,17,485 |
82,064 | 344 | 17,500.00 | 8.35 | 10,33,311 |
17,838 | 297.1 | 17,550.00 | 11.1 | 4,20,263 |
1,96,858 | 251 | 17,600.00 | 14.2 | 12,19,184 |
1,54,144 | 206.8 | 17,650.00 | 19.7 | 5,87,429 |
8,63,649 | 164.1 | 17,700.00 | 28.3 | 17,58,651 |
6,34,432 | 127.2 | 17,750.00 | 40.85 | 9,70,942 |
31,72,316 | 95 | 17,800.00 | 58.2 | 28,10,970 |
12,49,886 | 68.85 | 17,850.00 | 81.55 | 7,13,788 |
16,73,940 | 47 | 17,900.00 | 110.7 | 5,96,891 |
6,48,108 | 31 | 17,950.00 | 143.45 | 85,178 |
17,61,063 | 20 | 18,000.00 | 183.15 | 2,18,238 |
5,78,871 | 12.4 | 18,050.00 | 224.75 | 8,799 |
9,80,719 | 8 | 18,100.00 | 270.65 | 17,480 |
3,92,617 | 4.55 | 18,150.00 | 317.85 | 1,208 |
6,02,230 | 3.2 | 18,200.00 | 366.4 | 6,846 |
2,50,779 | 2.1 | 18,250.00 | 416.75 | 128 |
3,92,408 | 1.55 | 18,300.00 | 464.1 | 1,443 |
1,21,898 | 1.3 | 18,350.00 | 514.7 | 112 |
2,30,953 | 1.2 | 18,400.00 | 569.95 | 40 |
This table illustrates how call premiums decrease and put premiums increase as the strike price rises above the spot price.
Understanding ITM, ATM, and OTM Contracts
These terms categorize options based on the relationship between strike price and spot price:
Call Options
- In-the-Money (ITM): Spot Price > Strike Price
- At-the-Money (ATM): Spot Price = Strike Price
- Out-of-the-Money (OTM): Spot Price < Strike Price
Put Options
- ITM: Spot Price < Strike Price
- ATM: Spot Price = Strike Price
- OTM: Spot Price > Strike Price
Because ITM contracts have intrinsic value, they command higher premiums, especially deep ITM contracts. Here's how to calculate intrinsic value:
- ITM Call Option: Spot Price – Strike Price
- ITM Put Option: Strike Price – Spot Price
As options become OTM, the premium reduces because there is no intrinsic value, only time value and volatility influence.
Liquidity and Strike Price Proximity
One clear pattern observed is that liquidity (volume of trades) tends to increase when the strike price is closer to the spot price. As the strike price moves away from the current market level, volume typically decreases, making those contracts less liquid.
Strike Price Intervals: What Are They?
A strike price interval is the fixed difference between two successive strike prices available for a stock or index. These intervals vary based on the price and liquidity of the underlying security and are predefined by the exchange.
Strike Price Intervals for Selected Stocks & Indices (as of 17/08/2022)
Stock/Index | Spot Price | Interval | Lot Size |
Nifty 50 | 17900 | 50 | 50 |
Bank Nifty | 39300 | 100 | 25 |
Vodafone India | 9 | 1 | 70,000 |
GMR Infra | 35 | 1 | 22,500 |
Hindustan Copper | 116 | 2.5 | 4,300 |
Hindalco | 438 | 10 | ,1075 |
Reliance Industries | 2,670 | 20 | 250 |
Nestle | 19,700 | 100 | 40 |
Honda Auto | 43,600 | 500 | 15 |
MRF | 87,100 | 500 | 10 |
Insights:
- As spot price increases, the strike interval also increases
- Higher lot sizes usually correlate with lower intervals
Choosing the Right Strike Price
Selecting the ideal strike price is critical. It directly affects:
- Premium paid
- Risk exposure
- Profit potential
A deep ITM contract has a higher premium but moves in sync with the stock's price. An OTM contract has a lower premium, but price movements are less responsive, especially as expiry nears.
Thus, your market outlook, capital availability, and risk appetite should guide your strike price selection.
Things to Remember
- Strike Price is the predetermined price for exercising the option contract.
- For call options, the higher the strike compared to spot, the lower the premium.
- ITM, ATM, and OTM categories stem from the strike–spot price relationship.
- Liquidity tends to rise as strike price nears spot price.
- ITM options, especially deep ITM, carry higher premiums due to their intrinsic value.
Strike price intervals differ across stocks and indices and are governed by exchange rules.