How does stock price affect option price?

The current stock price is fairly straightforward. As the price of a stock rises, the more likely it is that the price of a call option will rise and the price of a put option will fall. If the stock price goes down, the reverse will most likely happen to the price of the calls and puts.

What happens when stock price reaches strike price?

When the stock price equals the strike price, the option contract has zero intrinsic value and is at the money. Therefore, there is really no reason to exercise the contract when it can be bought in the market for the same price. The option contract is not exercised and expires worthless.

What happens when a call option expires above strike price?

In the case of call options, if the stock trades above the strike price the option is in the money. Exercising the call option will allow you to buy shares for less than the prevailing market price. However, if the stock trades below the strike price, the call option is out of the money.

What happens if a call option expires in the money?

If your call options expire in the money, you end up paying a higher price to purchase the stock than what you would have paid if you had bought the stock outright. You are also out the commission you paid to buy the option and the option’s premium cost.

What happens when a stock price rises above the strike price?

When a stock’s market price rises above the strike price, a put option is out of the money. This means that, other than the premium, the option has no value and the price is close to nothing. The reason is simple: you would have to pay more for the shares than the strike price you would get by exercising the option to sell the shares.

What is Strike/exercise price in options trading?

The strike/exercise price is part of the option contract it does not change, however the stock price fluctuates on a daily basis. In the previous lesson we revealed that the exercise price is one of the factors that affect the options value, particularly its relation to the current market price of the stock.

How do stock options work in the stock market?

A stock option contract guarantees you a specified “strike price” for a limited time. If it’s a call option, you can use, or exercise, the option to purchase a stated number of shares at the strike price. Put options allow you to sell shares at the strike price.

What happens if you pick the wrong strike price?

Pick the wrong strike price and your profits will suffer. The strike or exercise price of an option is the “price” at which the stock will be bought or sold when the option is exercised. We haven’t directly discussed the strike/exercise price but in an earlier lesson we went over the four components of a stock option.