Strike Price
The strike price, or exercise price, is the fixed price at which the holder of an option can buy (call) or sell (put) the underlying asset.
Every option contract has a strike price set when the contract is listed. Exchanges offer a range of strikes above and below the current stock price, typically at regular intervals such as $1, $2.50 or $5 apart.
The relationship between the strike and the current price determines whether an option is in the money, at the money or out of the money. A call is in the money when the stock is above the strike; a put is in the money when the stock is below it.
Choosing a strike is a trade-off between cost and probability. Out-of-the-money options are cheaper but less likely to be worth anything at expiration; in-the-money options cost more but behave more like the stock itself.
Example: with a stock at $40, a $35 call is in the money by $5, so its premium must be at least $5 per share. A $45 call on the same stock is out of the money and costs less, since the stock must rise more than $5 before expiration for the call to have value at that point.