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 Strike Price

The final basic element parameter of options pricing is the strike price, which is the settlement price of the contract.

In general, the accepted terms of naming an option is by its relation to the underlying security price. The generally accepted names are:

• At the money (ATM)
• In the money (ITM)
• Deep in the money (DITM)
• Out of the money (OTM)
• Far out of the money (FOTM).

There are also ‘deep deep’ in the money or ‘far far’ out of the money options contracts and the terminology is understandable according to other contracts’ names.

The call option contract and the put option contracts can be with same name in one condition and it is ATM that the strike price is the closest to the underlying security market price.

In the money (ITM) in a call option means that the strike price is lower than the market price and lower than the ATM option contract. Deep in the money is at least a strike or more lower than the ITM call option contract.

Recalling from the call options contracts definition, the contracts owner has a right to sell the underlying security to the contracts writer and then if the options owner wants to exercise the contract a good deal will be if the contract’s strike price will be lower than the underlying security market price at expiration.

Example:
If the strike price is $50.00 and the security price is $55.00, the options owner has two options:

1. To receive the difference between the security price and the strike price (if he will not exercise the options contract).

2. If it is an American-style options contract, the contracts owner will buy from the option writer the underlying security at $50.00, exchangeable for $55.00 on the market (one stock option contract represent 100 stocks, meaning that if the owner exercises, every contract represents 100 stocks means for every contract the exercise will cost $5,000 and will worth $5,500).

Recalling from the put options contracts definition, the contracts owner has a right to buy the underlying security from the contracts writer, then, if the options owner wants to exercise the contract, a good deal will be if the contracts strike price is higher than the underlying security market price at expiration.