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Getting Started in Options
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Strike
Price, the Point of Inflection
The
strike price is the exercise price; the price specified in the
contract at which the option holder can buy shares. In our example, the strike price is $100. The buyer of the IBM November 100 call has the right to buy
shares of IBM at $100 any time prior to expiration in November. As you might expect, the strike price plays a tremendous
role in the value of an option contract.
In
the case of calls, when the underlying common stock moves above
the strike price the option is said to be in-the-money. For example, if IBM rallied to $110 the IBM November 100
calls would be in-the-money (actually $10 in-the-money).
If the IBM shares were trading at $100 the option would be
at-the-money and if IBM Corp. common stock slipped to $90 the IBM
Corp. November 100 calls would be out-of-the-money (actually $10
out-of-the-money).
In
the case of puts, when the common stock falls below the strike
price it is said to be in-the-money. When the price of the common stock and the strike price are
the same the option is at-the-money and when the common stock
rises above the strike price the option is said to be out-of-the-money.
These
concepts are most important to the option writer because the odds
favor that all things being equal, most out-of-the-money and most
at-the-money options will not be exercised by option holders.
Usually an option holder will only exercise an option that
has some intrinsic value at expiration.
underlying
security 
exercising an option
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