Define the Term “Strike Price” in an Options Contract.
The strike price, or exercise price, is the fixed price at which the option holder has the right (but not the obligation) to buy (for a call) or sell (for a put) the underlying asset upon exercise. It is a crucial parameter that determines the option's intrinsic value and moneyness.
The strike price is set when the option contract is created.
Glossar
Intrinsic Value
Valuation ⎊ This represents the in-the-money amount of an option, calculated as the difference between the spot price and the strike price, if positive, otherwise zero.
Strike Price
Reference ⎊ The Strike Price is the predetermined reference level set at the contract's inception against which the underlying crypto asset's spot price is compared at expiration or exercise.
Option Contract
Derivative Foundation ⎊ An Option Contract is a formalized agreement granting the holder the right, but not the obligation, to buy or sell an underlying asset, such as a cryptocurrency, at a predetermined price on or before a specified future date.
Crypto Options
Valuation ⎊ Crypto options, representing rights ⎊ not obligations ⎊ to buy or sell a cryptocurrency at a predetermined price before an expiration date, derive valuation from underlying asset price, time to expiry, volatility, and prevailing risk-free interest rates; models like Black-Scholes, adapted for crypto’s unique characteristics, are frequently employed, though parameter estimation presents challenges due to nascent market data and potential for manipulation.
Option Holder
Entitlement ⎊ An option holder, within cryptocurrency derivatives, represents the individual or entity possessing the contractual right, but not the obligation, to buy or sell an underlying asset at a predetermined price on or before a specified date.
Underlying Asset
Futures Pricing incorporates the cost of carry, which in crypto markets includes funding rates derived from perpetual swap markets and the time value associated with holding the spot asset.