Every put option specifies a price at which the buyer shall have the right to exercise his option to sell the underlying security to the option seller. Similarly, every call option stipulates a price at which the buyer shall have the right to call upon the seller to sell him the underlying security. This price is called the strike price; also called the exercise price. Every put option and every call option that is contracted could have a unique exercise price.
Fixing the Strike Price
These unique prices are to be fixed in line with the intervals decided by the stock exchange. Usually, the prices are fixed at intervals of Rs.2.50, Rs.5.00, Rs10.00, Rs.15.00 and Rs.20.00 depending upon the closing price of the underlying security. Normally, eleven such prices are declared for each option; 5 prices at a premium and 5 prices at a discount to the spot market price and 1 equivalency.
Strike Price and Option Price
Options are purchased by the buyers by paying a price called the premium or the option price. For put options, there is a direct relationship between the strike price and the option price (premium) – the higher the strike price, the higher the option price. For call options the relationship is inverse – the higher the strike price, the cheaper the option price (premium).
