In case of an option contract, the strike price is the price at which the underlying asset can be bought or sold by the option holder. This price is predetermined by the parties involved at the time of the contract and is an important factor in deciding the profitability of the contract.
If the market price of the underlying asset is higher than the strike price of a call option, the option holder can exercise their right to buy the asset at the lower strike price and then sell it in the market at the higher price, making a profit. Conversely, if the market price of the underlying asset is lower than the strike price of a put option, the option holder can exercise their right to sell the asset at the higher strike price and then buy it in the market at the lower price, again making a profit.
The strike price is therefore a crucial aspect of an option contract, and is determined based on a combination of factors such as the current market price of the underlying asset, the volatility of the market, and the expiration date of the option contract.
It is important to note that the strike price does not change over the life of the contract, and can only be modified through mutual agreement by the parties involved. As such, it is crucial to carefully consider the strike price at the time of entering into the contract, and to ensure that it reflects the expectations and goals of both parties.
In conclusion, understanding the role of the strike price is essential for anyone engaged in option trading. By carefully considering this aspect of the contract, traders can make informed decisions that will help them achieve their financial goals. So, it is necessary to take into account all the factors while deciding the strike price and make an informed decision.