Options Explained for Beginners: Strike Prices and Moneyness

Two traders can have exactly the same view on a stock and choose two different option strikes. Both can be directionally correct, yet the options they hold can behave very differently. The reason is that the strike price changes far more than the price you pay. It changes how the option responds to movement, how much intrinsic value it contains and how its risk characteristics behave.

This article follows the video above and covers the same ground in text: what a strike price is, what in the money, at the money and out of the money really mean, and how different strikes behave. Nothing here is a recommendation to trade anything. It is the mechanics, which is what you need before any strategy makes sense.

What a strike price is

The strike price is the price at which an option contract gives its holder the right to buy or sell the underlying asset, depending on whether the contract is a call or a put.

• For a call option, the strike is the price at which the holder has the right to buy the underlying.
• For a put option, the strike is the price at which the holder has the right to sell it.

Everything else in this article flows from the relationship between that strike and where the stock is actually trading.

Moneyness: in, at and out of the money

The relationship between the current stock price and the strike price is called moneyness.

For calls:

• A strike below the current stock price is in the money.
• A strike close to the current stock price is at the money.
• A strike above the current stock price is out of the money.

For puts the relationship is reversed:

• A strike above the stock price is in the money.
• A strike around the stock price is at the money.
• A strike below the stock price is out of the money.

The thumbnail of the video shows it for calls on a stock, XYZ, trading at $100: the 95 strike is in the money, the 100 strike is at the money, and the 105 strike is out of the money.

Intrinsic value: why strikes carry different premiums

One of the most important differences between strikes is intrinsic value. Intrinsic value is the amount by which an option is already in the money.

Suppose XYZ is trading at $100. A hypothetical 95 call has $5 of intrinsic value, because the right to buy at $95 is worth $5 a share when the stock is at $100. A 100 call has approximately zero intrinsic value. A 105 call also has zero intrinsic value.

That helps explain why different strikes have different premiums. An in-the-money option may already contain intrinsic value. An at-the-money or out-of-the-money option may consist largely or entirely of extrinsic value: the part of the premium that reflects the chance of the option becoming worth something before expiry.

The premium also reflects other variables, including time to expiration, implied volatility, interest rates and the characteristics of the underlying asset. Strike is the biggest single lever, but it is not the only one.

Delta: how sensitive a strike is to the stock

Strike price also affects how sensitive an option is to movements in the underlying. One of the measures used to describe that sensitivity is delta.

Delta estimates how much an option’s price may change for a one-unit move in the underlying, assuming other variables remain unchanged. It is not a guarantee. It is a sensitivity measure.

Delta itself is not fixed. As the underlying price changes, an option can move from out of the money, toward at the money, and then into the money. As that happens, its delta changes as well.

How different strikes behave on a chart

Put the same idea on a price chart. As XYZ trades up and down, each option’s price responds by a different amount.

• The in-the-money call typically moves most in dollar terms.
• The out-of-the-money call moves less in dollars, but can move more in percentage terms.
• All the while, time is passing, steadily eroding extrinsic value.

Rather than thinking of one strike as universally better than another, it is more useful to understand that different strikes have different characteristics.

The common mistake: comparing strikes by premium alone

One common mistake is to compare options only by their premium. An out-of-the-money contract may appear cheaper in dollar terms, but that does not mean it gives the same exposure as an in-the-money or at-the-money contract.

The sensitivity, the intrinsic value, the probability characteristics and the response to time can all be different. A cheaper contract is a different contract, not a discount on the same one.

Delta is one of the Greeks

Delta is only one of the measures traders call the Greeks. Picture the curve of an option’s value against the stock price:

• Delta is the slope of that curve: how much the option’s value changes for a $1 move.
• Gamma measures how quickly that slope changes, and it is typically largest near the strike.
• Theta describes time decay. As expiration approaches, extrinsic value erodes, and that erosion tends to accelerate.
• Vega describes sensitivity to implied volatility. Higher implied volatility generally means more extrinsic value.

That is why strike, expiration and volatility should be studied together rather than as isolated decisions.

Seeing price and time together: the scenario map

One way to see price and time in the same picture is a scenario map. Each row is a hypothetical price for XYZ. Each column is a date before expiration. Each cell shows how the value of a hypothetical 100 call might change from today.

Read across a row and the same price target produces a different result depending on when it is reached. Read down the final column and only intrinsic value remains. Drawn as a graph, the curves show the same thing: as time passes, the curve converges on its value at expiration.

This illustrates how the contract behaves. It is not a forecast.

Bringing it together: three calls on the same stock

Assume XYZ is trading at $100 and we are comparing three call options with the same expiration date. One has a 95 strike, one has a 100 strike and one has a 105 strike.

Strike	Moneyness	Intrinsic value at $100	Premium made up of	Typical behaviour
95	In the money	$5	Intrinsic plus extrinsic	Moves most in dollar terms
100	At the money	About zero	Almost all extrinsic	Gamma largest here
105	Out of the money	Zero	All extrinsic	Cheaper in dollars, moves less in dollars, more in percentage terms

The point is not to decide which one should be traded. The point is to understand how the contracts differ.

Why this matters

The strike price is much more than a number printed on an option contract. It determines the relationship between the contract and the underlying price, and that relationship affects moneyness, intrinsic value, premium and sensitivity.

In-the-money, at-the-money and out-of-the-money options are not simply expensive, average and cheap versions of the same trade. They are contracts with different characteristics.

This is also why options education makes more sense when it sits inside a broader process. Understanding the instrument is important, but so is understanding the market environment, the underlying thesis and the portfolio risk surrounding it. That is the logic of the four pillars: the macro pillar builds the view on the environment, the fundamentals pillar finds the company, the options pillar is how you express that view with defined risk, and the risk pillar decides how large the position should be inside the rest of your book.

What this does not cover

Strategies: spreads, covered calls, protective puts and the rest. None of them make sense until the behaviour of a single strike does, which is why the video stops where it does. If you want to see how options are taught inside a structured programme rather than from scattered videos, the full review of 4 Pillar Trading covers the options sessions, the mentors who teach them, and what the membership costs.

This article is educational and is not financial advice. Options involve risk and are not suitable for everyone. Do your own research and speak to a qualified professional before trading.