Strike price

Strike price
This article is licensed under the GNU Free Documentation License. It uses material from the Wikipedia article "Strike_price".

In options, the strike price, or exercise price, is a key variable in a derivatives contract between two parties. Where the contract requires delivery of the underlying instrument, the trade will be at the strike price, regardless of the spot price (market price) of the underlying instrument at that time.

Definition - The fixed price at which the owner of an option can purchase, in the case of a call, or sell, in the case of a put, the underlying security or commodity.

content

1 Moneyness
- 1.1 Mathematical Formulae
2 See also
3 References

Moneyness

Moneyness is a term describing the relationship between the strike price of an option and the current trading price of its underlying security. Where settlement is financial, the difference between the strike price and the spot price will determine the value, or "moneyness", of the contract.

In options trading, terms such as in-the-money, at-the-money and out-of-the-money describe the moneyness of options.

Mathematical Formulae

A call option has positive monetary value when the underlying has a spot price (S) above the strike price (K). Since the option will not be exercised unless it is "in-the-money", the payoff for a call option is

$max\left[(S-K);0\right]$

also written as

$(S-K)^{+} \$

where

$(x)^+ =\{^{x\ \ x\geq0}_{0\ \ x<0}$

A put option has positive monetary value when the underlying has a spot price below the strike price; it is "out-the-money" otherwise, and will not be exercised. The payoff is therefore

$max\left[(K-S);0\right]$

$(K-S)^{+} \$

For a digital option payoff is $1_{S\geq K}$ , where $1 {}$ is the indicator function.

References

McMillan, Lawrence G. (2002). Options as a Strategic Investment, 4th ed., New York : New York Institute of Finance. ISBN 0-7352-0197-8.

v • d • e Derivatives market

Derivative (finance)

Options	Terms: Strike price · Expiration · Volatility · Open interest · Pin risk · Risk-free rate Vanilla options: Option styles · Call · Put · Warrants · Fixed income · Employee stock option · FX · Bond option Exotic options: Asian · Lookback · Barrier · Binary · Swaption · Mountain range · Rainbow option · Compound option Options strategies: Covered call · Naked put · Collar · Straddle · Strangle · Butterfly · Iron condor Options spreads: Bull spread · Bear spread · Calendar spread · Vertical spread · Debit spread · Credit spread Valuation of options: Moneyness · Option time value · Put-call parity · Black-Scholes · Black · Binomial · Simulation

Swaps	Interest rate swap · Total return swap · Equity swap · Forex swap · Currency swap · Constant maturity swap · Basis swap · Volatility swap · Credit Default Swap · Variance swap

Other derivatives	Equity derivative · Fund derivative · Credit derivative · CPPI · Interest rate derivative · Inflation derivatives · Real estate derivatives · PRDC

Your Ad Here

Contents

Moneyness

Mathematical Formulae

See also

References