What is strike price?
Strike price is another important term used in options trading. It is the price at which the option can be exercised. In simple, it is the betting or expectation price where you think markets may go up to. Let us take nifty call put for better understanding. For instance, if nifty is trading at 5480 and you think markets may move further 220 points UP, then one can opt to buy a Nifty CALL of 5700 strike price (5480+220=5700) — ‘Nifty 5700 CE’. (5700 is not the buying price value but only an estimated level till where nifty many reach in the near future, moreover its just like a name given to that option. Current buying price value is called premium where you buy, say it as Rs.40) As well if you predict that nifty may crash 280 points more, you can opt to buy a Nifty PUT of strike price 5200(5480-280= 5200) — ‘Nifty 5200 PE’ (say its current price/premium is around 50).
NOTE: Strike prices are available only with a difference of 100. So trader has to opt for 5600 CALL, 5700 CALL or 5800 CALL ……
Now what is my profit if my expection is correct?
In the first case, if you expectation is correct, you would get a profit around 220 points. You predicted market when the price is around 5480 and as per your expectation nifty travelled from 5480 to 5700 (220 points). At the time of your buying, we assumed the premium/current price is around 40. When market reaches your expected level of 5700, you get 40+220=260 where you get a profit of 220 points leaving your initial investment 40 points. Now if the lot size of nifty is 50 shares, you would get a final amount of Rs.13,000 (260 points X 50 shares) — 11,000 profit and 2,000 investment return.
In the second case, if your bet is correct, nifty fell from 5480 to 5200 and at the time your PUT buy, say the current price of premium is 50, you get 50+280 = 330 points in which 280 is the profit and 50 being your investment return.
Summary of strike price:
Strike price is the term used to refer the gap between expected move and current nifty price
Strike prices are available with a difference of 100 points for nifty index
Based on current price, strike prices are divided into ITM, OUT and ATM (moneyness of options)
Posted on: 2016-06-30 12:07:51 Updated on: 2016-07-04 14:03:13