Strike Price, Premium, and Expiration

The Three Pillars of Every Option Contract

Every option you'll ever trade comes down to three things: the strike price, the premium, and the expiration date. Get comfortable with these three and you can read any options chain like a menu. Let's break them down.

Strike Price

The strike price is the price at which shares change hands if the option is exercised. For puts, it's the price you'd buy shares at. For calls, it's the price you'd sell shares at. Strikes come in fixed increments -- $1, $2.50, or $5 apart depending on the stock. In the wheel, the strike you pick is basically you saying, 'I'd be happy buying (or selling) at this price.'

• In-the-money (ITM): The option has real value right now. For puts, strike is ABOVE the stock price. AAPL at $190, a $195 put is ITM by $5.
• At-the-money (ATM): Strike is roughly equal to the current stock price. AAPL at $190, the $190 strike is ATM.
• Out-of-the-money (OTM): The option has no intrinsic value. For puts, strike is BELOW the stock price. AAPL at $190, a $185 put is OTM. This is where we live in the wheel.

Premium

Premium is the price of the option -- what the buyer pays and you (the seller) collect. It's quoted per share, so always multiply by 100. Premium is driven by how close the strike is to the stock price, how much time is left, and how volatile the stock is. More fear in the market = fatter premiums for us.

Expiration Date

Every option has an expiration date -- after that, the contract is gone. Monthly options expire the third Friday of each month. Weekly options expire every Friday. More time = more premium, but also more uncertainty. There's a sweet spot, and I'll tell you exactly where it is.