Example of a strike price
At market’s close on April 6, 2023, Tesla (TSLA +0.11%) stock traded for $185.06. As an example, let’s look at options contracts with 28 days until expiration.
In-the-money calls with a strike price of $120 had a bid price of $65.40. Since options contracts represent $100 shares, traders were willing to pay $6,540 for the right to purchase 100 shares of Tesla if the stock’s price dipped to $120 per share. However, the price of a put contract with the same strike price and expiration date was just $0.36. Since Tesla is trading just above $185, a contract that allows you to sell the stock for only $120 is almost worthless.
But as the strike price approaches the expiration date, the bid price of call options drops significantly. A call option with 28 days until expiration and a $185 strike price had a bid price of $13. And the price of put options with the same expiration date and strike price increased to $12.25.
When strike prices are well above the current price of Tesla’s stock, the value of call options drops significantly. A call option with a $200 strike price had a bid price of just $6.90 since it is significantly out of the money. Meanwhile, a put option with a $200 strike price was in the money and trading for $21.10.