The strike price is the predetermined price at which an option holder may buy or sell the underlying asset. A call uses the strike price to buy; a put uses it to sell. The option buyer pays a premium for this right but is not required to exercise it. section 1.2.7
Think of the option as an API key: the premium buys access to a buy() or sell() function under specified conditions. If those conditions are unattractive, the buyer can let the option expire, limiting the buyer’s loss to the premium. section 1.2.7
The strike price shapes both simple options and option-selling strategies:
- A covered call sells a call at a $110 strike against shares bought at $100; a rally to $120 can require selling at $110. section 7.4.1
- A cash-secured put sells a put at a lower strike, potentially forcing the seller to buy if the share price falls; a severe collapse can create large losses. section 7.4.1
- Exercise timing depends on the option type: European-style options exercise only at expiration, while American-style options may exercise earlier. section 7.4.1
