Are you tired of working a 9 to 5 job and barely making ends meet? Do you want to try your luck in the stock market and make some real money? Well, look no further because I’m here to give you some tips on one of the most important concepts in options trading: strike price.

For those who are new to trading, let me break it down for you. A strike price is the predetermined price at which a derivative contract can be bought or sold when it is exercised. In simpler terms, it’s like placing an order for a specific item at a specific price.

Now, why is this important? Well, when you buy an option contract (which gives you the right but not the obligation to buy or sell an underlying asset), there are two types of options: call options and put options. A call option gives you the right to buy an underlying asset at a certain price (strike price) within a certain time frame. On the other hand, a put option gives you the right to sell an underlying asset at a certain price (strike price) within a certain time frame.

Let’s take an example to understand this better. Say Apple Inc.’s current stock price is $150 per share and you think that its stock will go up in value over the next few weeks. You decide to purchase a call option with a strike price of $155 expiring in two weeks for $5 per share ($500 total). This means that if Apple’s stock goes up above $155 before your option expires, then you have the right to purchase it at that lower cost and sell it for profit; however, if Apple’s stock doesn’t reach $155 by expiration date then your option will expire worthless.

Now let’s look at another scenario where instead of buying call options on Apple Inc., we decide to buy put options because we think their stock will decrease in value over time. Let’s say the current stock price is $150 per share and you purchase a put option with a strike price of $145 expiring in two weeks for $3 per share ($300 total). This means that if Apple’s stock goes below $145 before your option expires, then you have the right to sell it at that higher value; however, if Apple’s stock doesn’t go below $145 by expiration date then your option will expire worthless.

As you can see, choosing the right strike price is crucial when trading options. It determines the potential profit or loss that one could make from an underlying asset. The further away the strike price is from the current market value, the less likely it is that an investor will make a profit.

But wait, there’s more! Strike prices also affect something called “option premiums” which are essentially how much an investor pays for an option contract. Option premiums fluctuate based on various factors such as time until expiration and volatility of underlying assets but they are heavily influenced by strike prices.

In general, call options with lower strike prices have higher premiums because they’re closer to being “in-the-money” (when current market value exceeds striking price). Similarly, put options with higher striking prices have higher premiums because they’re closer to being “in-the-money.”

Now let’s talk about some real-world examples where people made fortunes (or lost) due to their choice of strike prices. In 2019, Tesla Inc.’s stock was skyrocketing and many investors were buying call options hoping for even greater returns. However, one man decided to take a riskier approach by purchasing deep out-of-the-money call options (strike price far above current market value). He purchased 10 contracts with a strike price of $7800 each for only $1.50 per contract ($150 total investment).

To everyone’s surprise (except maybe Elon Musk), Tesla’s stock continued its upward trajectory and hit over $900 per share. This meant that the man’s options were now worth $120,000, a whopping 80,000% return on his initial investment! Of course, not everyone was as lucky. Many investors who purchased call options with higher strike prices (but still in-the-money) didn’t see nearly as big returns and some even lost money due to high premiums.

In conclusion, strike price is an important concept that every options trader should understand before jumping into the market. It determines potential profits or losses and heavily influences option premiums. Choosing the right strike price takes careful consideration of various factors such as current market value, volatility of underlying assets, and time until expiration.

So if you’re ready to take your chances in the stock market world of trading options then remember: don’t be afraid to take risks but make sure you do your research and choose wisely!