Strike price explained: option exercise price definition

By Ken Chigbo, Founder, KenMacro. Published 2026-05-13.

What is strike price?

A strike price, also called the exercise price, is the predetermined level written into an option contract at which the holder may transact the underlying asset. For a call, it is the price at which the buyer can purchase the underlying; for a put, it is the price at which the buyer can sell. The strike is set when the contract is created and does not change. It serves as the reference point against which intrinsic value is measured: the difference between the strike and the current spot or futures price determines whether the option sits in the money, at the money, or out of the money.

How traders use strike price

Retail option traders select strikes based on their directional view, time horizon, and risk budget. A trader expecting a moderate move in EUR/USD might buy a call with a strike slightly above current spot, accepting a lower premium in exchange for needing a larger move to profit. Institutional desks build structured positions across multiple strikes, including verticals, condors, and risk reversals, to express precise views on direction and volatility. Market makers quote bid-ask spreads at each listed strike, with wider spreads typically appearing on deep out-of-the-money strikes due to thinner liquidity. The strike chosen also dictates how the option’s delta, gamma, and theta evolve as spot moves, which matters for anyone hedging or managing a book dynamically.

Worked example of strike price mechanics

Consider a trader who buys a GBP/USD call with a strike of 1.2700 expiring in one month, paying a premium. If spot finishes at 1.2850 on expiry, the option is in the money by 150 pips, and the holder exercises or settles for that intrinsic value, less the premium paid. If spot finishes at 1.2650, the call expires worthless and the trader loses the premium. The strike of 1.2700 anchors the entire payoff: every pip of spot movement above it adds intrinsic value, every pip below leaves the option without exercise value at expiry.

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Frequently asked

What is the difference between strike price and spot price?

The strike price is the fixed exercise level written into the option contract and never changes. The spot price is the current market price of the underlying asset, which moves continuously during trading hours. The relationship between the two determines whether an option has intrinsic value: a call is in the money when spot sits above strike, a put when spot sits below strike. The strike is contractual, the spot is observable in real time.

How do traders choose a strike price?

Choice depends on directional view, expected size of move, time to expiry, and capital at risk. At-the-money strikes carry the highest premium and highest gamma, making them sensitive to small spot moves. Out-of-the-money strikes cost less but require larger moves to pay off. In-the-money strikes behave more like a position in the underlying. Traders weigh these trade-offs against implied volatility and their conviction in the timing of the expected move.

Can the strike price change during the life of an option?

Under normal circumstances, no. The strike is fixed at contract creation and remains constant until expiry or exercise. The only exceptions involve corporate actions on equity options, such as stock splits, special dividends, or mergers, where the listing exchange adjusts the strike to preserve the economic value of the contract. In FX and commodity options, strikes typically remain unchanged for the entire contract life.

What does in the money, at the money, and out of the money mean?

These terms describe the relationship between strike and spot. A call is in the money when spot exceeds strike, at the money when they are equal, and out of the money when spot is below strike. For puts, the relationship reverses. In-the-money options carry intrinsic value, at-the-money options carry mostly time value, and out-of-the-money options carry only time value and expire worthless if spot does not cross the strike before expiry.

Educational analysis only. Past performance does not guarantee future results. Manage risk against your own portfolio.