Key Takeaways: · The strike price of an option is the price at which a put or call option can be exercised. · A relatively conservative investor might opt for a call option ...LinkedInwithBackgroundOptionsTradingStrategy&EducationOptionsTradingGuideOptions&DerivativesTradingOptionsTradingStrategy&EducationTableofContentsExpandStrikePriceConsiderationsRiskToleranceRisk-RewardPayoffStrikePriceSelectionExamplesCase1:BuyingaCallCase2:BuyingaPutCase3:WritingaCoveredCallPickingtheWrongStrikePriceStrikePricePointstoConsiderTheBottomLineThestrikepriceofanoptionisthepriceatwhichaputorcalloptioncanbeexercised.Itisalsoknownastheexerciseprice.Pickingthestrikepriceisoneoftwokeydecisions(theotherbeingtimetoexpiration)aninvestorortradermustmakewhenselectingaspecificoption.Thestrikepricehasanenormousbearingonhowyouroptiontradewillplayout.KeyTakeaways:Thestrikepriceofanoptionisthepriceatwhichaputorcalloptioncanbeexercised.Arelativelyconservativeinvestormightoptforacalloptionstrikepriceatorbelowthestockprice,whileatraderwithahightoleranceforriskmaypreferastrikepriceabovethestockprice.Similarly,aputoptionstrikepriceatorabovethestockpriceissaferthanastrikepricebelowthestockprice.Pickingthewrongstrikepricemayresultinlosses,andthisriskincreaseswhenthestrikepriceissetfurtheroutofthemoney.StrikePriceConsiderationsAssumethatyouhaveidentifiedthestockonwhichyouwanttomakeanoptionstrade.Yournextstepistochooseanoptionsstrategy,suchasbuyingacallorwritingaput.Then,thetwomostimportantconsiderationsindeterminingthestrikepriceareyourrisktoleranceandyourdesiredrisk-rewardpayoff.RiskToleranceLet’ssayyouareconsideringbuyingacalloption.Yourrisktoleranceshoulddeterminewhetheryouchoseanin-the-money(ITM)calloption,anat-the-money(ATM)call,oranout-of-the-money(OTM)call.AnITMoptionhasahighersensitivity—alsoknownastheoptiondelta—tothepriceoftheunderlyingstock.Ifthestockpriceincreasesbyagivenamount,theITMcallwouldgainmorethananATMorOTMcall.Butifthestockpricedeclines,thehigherdeltaoftheITMoptionalsomeansitwouldde