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All You Need to Know About Strike Price
If you are a regular investor, then the term Strike Price will be quite obvious to you. If you are not yet into the investment business or your forays into the market is sketchy at the most, then one of the fundamentals that you will come across is about the Strike Price.
Strike price is defined as the price at which given options or indexes are bought or sold. In marketing parlance a call means a Buy option while put stands for selling an option. This is the most commonly looked at and used term in trading circles. The strike price is compared to previous market values of the same option and helps in determining what an investor will like to do with his stock.
In the trading terminology, strike price is categorized into 3 types, namely:
- Out of the money – when the strike price is out of the money, the trader may call or buy the shares whenever he finds out that the strike price if greater that the recent market rate or if the present market value of his shares is lesser that the strike price and he may sell or put his shares to yield profit.
- In the money - when the strike price is in the money, it indicates while buying new shares, the hot market price is greater than the strike price and when selling the market price is less than the strike price resulting into losses.
- At the money – if the strike price is at the money, it means that the present market price is same as the strike price and the trader may want to wait for the tight time.
Experience together with precise update of the statistical prospects achieved through thorough study with the help of available technology and tools, Forex traders can pull off huge profits with lesser probability of incurring loss.
There are various other factors that determine the premium of any given option or index. The most important among them is the Strike Price. Other features include market volatility, time until expiration and interest rates.
Thus, the difference between the strike price and the prevalent market price helps in determining the profit or loss made on the given option.
One of the most important fundamentals to be kept in mind while tracking the strike price, is that the strike price doesn't always represent the actual strength of a given index or option. Many a time, a fundamentally weak company may show a higher strike price due to a buoyant market and investor hype. The reverse is equally true with fundamentally strong options quoting a much lower strike price owing to a prevalent bear run in the market.
Though the strike price cannot be ignored, too much importance cannot and should not be attached to them. In case of hedge funds and short term selling strike price helps in increasing the profit margin and planning on the call and put options.
So the take home message from our discussion is that Strike Price is important but cannot be depended upon in its entirety.