The strike price is the price an options contract or other derivative must reach in order to be exercised. Holders of the options or derivatives contract may exercise the strike price until the expiration date. Both the strike price and expiration date are set at the time the options or derivative contract is purchased. For call options the strike price is the price the underlying security may be bought at, and for put options, the strike price represents at what price the asset may be sold.
In the money vs out of the money
You may see the strike price listed as in the money (ITM) if it is below the underlying security’s price, and out of the money (OTM) if it is above the underlying security’s price. Compared to OTM strike prices, ITM strike prices immediately have intrinsic value at the time of purchase because their positions are already within the market’s price and therefore executable. They are typically used to hedge positions and cost more than OTM contracts because of this relative safety. OTM contracts have no intrinsic value at the time of their purchase because they are unable to execute until the market price reaches the level specified. However, OTM contracts generally have a lower price than ITM, and this lower price means larger percent gains and losses since the lower purchase price allows for larger percent returns.