Can someone explain strike prices for dummies

T

thyrus

So yes, I've read books, googled, and still do not have a clear idea of how strike prices work and what the best options for me to use them are.

Let's say Stock X is trading at $15. I think it will go up to $20 by the end of this week, and therefore would like to Buy a Call.

There is an option expiration date available for May 15, 2020 as well as June 15, 2020. I only want to hold it for this week, so May 15 is fine.

Now looking at the strike prices, I see options of $11,12,13,14,15,16,17,18,19.

From my understanding, I can exercise this option only if the stock price is higher than the strike price. Is there a difference if the strike price is closer to the stock price (say $14), then $11?

What happens if I get the strike price at $14, and the stock falls to $11... can I exercise it? I guess I do not have a firm grasp of how the strike price affects the trade.
 
ajacobson said:
The strike is simply the price at which you can exercise the option and end up owning the stock - irrelevant of the price in the marketplace. As the option pricing inputs change the option will change in price.
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Now when I want to exercise the call, say after it reaches 20, does that strike price impact the buyer on the other end? The lower it is, the more desirable it is for them?
 
thyrus said:
What happens if I get the strike price at $14, and the stock falls to $11... can I exercise it? I guess I do not have a firm grasp of how the strike price affects the trade.
More...

There is plenty of information online that outlines the basics of options. Keep reading, that is the only way you will learn.

But to answer your question quoted above...

I am specifically referring to call options here. The strike price is the price the buyer of an option can acquire the shares at when it is exercised. So in your example, you wouldn't exercise an option that is not "in the money" because you would be paying a higher price than the market price for the stock. Why would you pay $14 when your can get it for $11? Keep in mind, if you exercise your option, you need to have the funds to pay for the shares. The alternative would be to sell the option before expiration.

I strongly recommend you don't start trading options until you have a very firm grasp about how they work. It will take time. You can always try "paper trading" to help you learn along the way.
 
thyrus said:
Now when I want to exercise the call, say after it reaches 20, does that strike price impact the buyer on the other end? The lower it is, the more desirable it is for them?
More...

There is no buyer on the other end when exercising an option. Do you mean selling your option? If so, yes, a buyer always wants to pay a lower price just like a seller always wants a higher price.

Keep in mind, a European option may be exercised only at the expiration date of the option. An American option may be exercised at any time before the expiration date.
 
They deliver at the strike or trade out of it in the marketplace - they are the mirror inverse of your trade. If you bought the right to buy at 14 - they sold the right to sell at 14 and both transactions are irrelevant of the price in the marketplace. You wouldn't pay 14 for a stock trading at 11. All settlement occurs after the COB of business. So exercising a call at 10 AM still gets you the COB. You can buy and sell through the trading day as long as the market is open. In the US we auto-exercise at expiration anything .01 in the money or more.
You really shouldn't concern yourself with the other side of your trade - worry about your economics.
 
thyrus said:
So yes, I've read books, googled, and still do not have a clear idea of how strike prices work and what the best options for me to use them are.

Let's say Stock X is trading at $15. I think it will go up to $20 by the end of this week, and therefore would like to Buy a Call.

There is an option expiration date available for May 15, 2020 as well as June 15, 2020. I only want to hold it for this week, so May 15 is fine.

Now looking at the strike prices, I see options of $11,12,13,14,15,16,17,18,19.

From my understanding, I can exercise this option only if the stock price is higher than the strike price. Is there a difference if the strike price is closer to the stock price (say $14), then $11?

What happens if I get the strike price at $14, and the stock falls to $11... can I exercise it? I guess I do not have a firm grasp of how the strike price affects the trade.
More...
Simply put

A call is a deposit to buy, not a down payment
A put is an insurance to sell

u can exercise any time u want if your the buyer but should you?
 
You can sell the option any time, but if the price goes the wrong way or as time runs out the option will become more worthless.

If the stock is 15 and you think 20 they you could buy the cheap 16 Calls or cheaper 18 calls, if the price goes to 20 then they'd be worth $4 and $2 + some time bonus if any left. ( OTM, out of the money )

You could also buy the 10's for $5+ Time fee so $6 area, goes to 20 then there worth $10, closes at $16 then you break even pretty much, $12 then you get $2 back. ( ITM in the money )
 
thyrus said:
Let's say Stock X is trading at $15. I think it will go up to $20 by the end of this week, and therefore would like to Buy a Call.

There is an option expiration date available for May 15, 2020 as well as June 15, 2020. I only want to hold it for this week, so May 15 is fine.

What happens if I get the strike price at $14, and the stock falls to $11.
More...

mostly covered in the replies above

depends on the stock/ETF, its 'implied volatility' 'expiry', 'strike price', 'the price of the call option'

$15 stock 7 calendar days to expiry, you want to buy the $14 call, using a 50% IV the cost of the $14 call will be approx $1.10

basic calculator http://www.option-price.com/index.php

plug the numbers based on stock price today, volatility, strike price or get the actual quote from your brokerage or barchart.com

if your bought call option strike price is $14, then at expiry the stock is say $15, the contract will expiry & you will get $1 for your $1.10 investment minus paid commissions, you lost money.

if the stock on expiry is below $14, you lost your bet + paid commissions.

if the stock is above $14 say $20, that's $20-$14 = $6 minus commissions.

if you think the stock will be $20, consider buying out of the money call somewhere between $16 -$20, the option premium will be less than buying an option in the money at $14

good luck with the trade
 
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