Strike price definition
What is a strike price in trading?
A strike price is a theoretical market price used in options trading. In put and call options trading, the strike price is the price at which a security can be bought or sold. In binary options trading, the strike price is the level a trader thinks the market will be above or below.
What does strike price mean in options trading?
The way a strike price is used will depend on the type of option in question. A binary option strike price is best thought of as a question: will the market be at, above or below this price, at this time?
Each binary option contract has its own strike price. You decide on the contracts you want to trade, and whether you are going to buy or sell those contracts, based on the strike price.
Nadex strike prices
Binary options are all or nothing, so when you’re trading them, you will receive a payout of either $100 or $0. This payout amount is dictated by the strike.
For Nadex Binary Option contracts based on stock indices, forex, and commodities, you would buy a contract if you think the market will be above the strike at expiration. You would sell a contract if you think the market will be below the strike at expiration. These are the various potential outcomes:
Contract expires above the strike (in-the-money) – buyer receives $100, seller receives $0.
Nadex events contracts work a little differently. The contract buyer receives the $100 payout if the market is at or above the strike at expiration, and the seller receives the $100 payout if the market is below the strike at expiration.
Strike prices in action: trading example
Here’s an example to show what strike prices look like and how they are used in trading:
Let’s say the indicative price for the US 500 is 3039.811 at 2.30 p.m. You want to trade a binary option contract based on this market, and you choose an expiration time of 4 p.m. You then look at the different strike prices available.
Strike prices will look like this:
US 500 >3101.6 (4 p.m.)
What this means is ‘will the US 500 finish higher than 3101.6 at 4 p.m.?’ If you think it will, you buy. If you think it won’t, you sell. This is just one of the many strike prices you can choose, each of which will come with its own risk-to-reward ratio. You can see your maximum possible profit/loss for each strike price in the Nadex platform.
Learn more about strike prices
Get a better understanding of what strike prices are and how they work with a Nadex demo account. You can explore the platform and practice trading with $10,000 in virtual funds.
Open a Nadex demo account to learn more about strike prices.