Strike Price
The fixed price written into an option contract at which the holder may buy or sell the underlying asset if the option is exercised.
What it is
The strike price (also called the exercise price) is the fixed, pre-set price built into an option contract. A call option gives its holder the right — not the obligation — to buy the underlying asset at the strike; a put option gives the right to sell at the strike. The strike is set when the contract is listed and normally stays fixed for the contract's whole life — only a clearing-house adjustment after a corporate action changes it — while the market price of the underlying moves around it. The relationship between those two numbers is what determines whether exercising the option would be worth anything at all.
Why it matters
The strike is the reference point for everything else about an option. Its distance from the underlying's market price sets the option's moneyness: in the money (exercising would have value), at the money (strike near the market price), or out of the money. It also splits the premium into intrinsic value — the amount already in the money — and time value, the rest. An option left out of the money at expiry simply expires, and the buyer's loss is the entire premium paid. The strike also fixes the obligation on the other side: a writer who is assigned must transact at the strike no matter where the market has gone, which for an uncovered call writer means there is no upper bound on the loss. Two options on the same stock with the same expiry but different strikes are different instruments, with different prices and different odds of finishing in the money.
How it's calculated
There is nothing for an investor to compute: the strike is fixed by the exchange when it lists a contract series. Exchanges list a ladder of strikes above and below the underlying's price, using standard intervals that vary by product and price level, and add new strikes as the underlying moves. Each combination of strike, expiry and type (call or put) is a separate contract. After a corporate action such as a stock split or spin-off, the clearing house — the OCC in the US, the CDCC in Canada — may adjust the strikes on existing contracts so the event does not distort them. In an over-the-counter option, the strike is whatever the two parties negotiate.