What is a strike price?

 

Video Transcription

Hi again. [Casey Jensen 00:00:01] here at Options ANIMAL. Now we're looking at a strike price. So what is a strike price? The easy was to understand a strike price, it's flexible. Options are so flexible, whatever you need, right? So if you're looking to be an income trader, there are options that are suitable for you. If you're looking for aggressive growth, trying to double your account perhaps, there are options for you. You might choose a different strike price if that makes sense. And if you're looking to preserve your capital, you might choose a different strike price.

So a strike price the market makers just need two individuals to agree upon a price, any two people on the planet. Let's talk about how this works. Let's say we're buying a call option. So we buy a call option in September that maybe had 90 days to expire, and we chose strike price 105. Well, what does that mean? It means you're buying the right to buy the stock at 105. So if the stock's trading at 100, and all the sudden it goes up to 120, well you have the right to buy it at 105. That is your strike price.

So the reason you have that right is there was another individual that took on an obligation to sell the stock at 105. So a strike price if you look right here, you just need two people to agree upon a price, and that's why you see 105, 100, 95. If I want to pay a little bit more premium, say pay $2 and have the right to buy the stock at 95, and the stock jumps up to 140, well I have the right to buy it at 95. I had to pay a little bit more for that.

And so you can see why options are flexible. It's just like insurance with a car. If you want to have full coverage for your car, great. Pay a little bit higher premium. If you want to just have liability, you pay a little bit less of a premium, and options are the same way. You use them for how you need them.