What is Exercise Price (Strike)?

One key characteristic of an option contract is the agreed upon price, known as the strike price or exercise price.

The strike price is the predetermined price at which you buy (in the case of a call) or you sell (in the case of a put) an underlying futures contract when the option is exercised.

When trading options you can choose from a range of strike prices that are set at predefined intervals by the exchange. The interval range may vary depending on the underlying futures contract.

While futures can trade at prices in between these intervals, the exchange attempts to set the option strike intervals to meet the market’s need for liquidity and granularity.

Each option product will have a unique price interval rule that is based on the product structure and the needs of the market. Not only will products have varying intervals, but also within certain products, the intervals will change depending on the expiration month.

For example, options on corn futures have an interval of 5 cents for the two front months, of the expiring futures contract and then transition to 10 cent intervals for contracts 3 months and beyond.

The full range of strike prices, for many options products, will be determined by the previous day’s daily settlement price for the futures contract.

Over time the entire range may expand beyond the initial listed boundaries, due to large market movements. In addition, strike intervals can become more granular as options move closer to expiration.

In our example we are going to look at a fictional contract with a December expiration. At outset of the option contract, the price rule dictates a 10 point interval and a 40 point range. Assume the underlying futures contract is trading around 100 points, the option price range will be set at 80, 90, 100, 110, and 120.

As the price of the underlying futures contract moves, the exchange will monitor and adjust the range of strike prices.

After the first quarter the futures market fell to 83 points, therefore another strike price at 70 was made available.

In the third quarter the futures contract rallied higher. The option contracts are now much closer to expiration and have increasing trading activity. To meet demand, additional strike prices at one point intervals are made available between 80 and 100.

By the last quarter the market continued upward and additional one point intervals were needed between 100 and 110.

More information on options, including exercise intervals, can be accessed on CME Group product pages.