6 min
Key Terms: Strike, Premium, Expiration
Every option has three essential attributes. Understanding these terms is critical before you can analyze any trade.
What you'll learn
- Define strike price, premium, and expiration date
- Understand how each term affects the cost and risk of an option
Strike Price
The strike price (or exercise price) is the price at which you can buy or sell the underlying stock. For a call option, it's the price you'd pay. For a put option, it's the price you'd sell at.
Strike Price Example
A call option with a $100 strike on AAPL gives you the right to buy AAPL shares at $100 each, regardless of the current market price.
Premium
The premium is the price you pay to buy an option (or the price you receive if you sell one). It's like an insurance premium. On this site, we use whole-dollar premiums to keep the math simple.
The premium is always paid upfront. For a buyer, this is the maximum amount you can lose. You can never lose more than the premium you paid when buying an option.
Expiration Date
Options don't last forever. The expiration date is the deadline by which the option must be exercised, or it becomes worthless. Typical expirations range from one week to several months.
Knowledge Check
If you buy a call option with a $150 strike for a $10 premium, what is the most you can lose?
The most you can lose is $10 (the premium). As a buyer, your maximum loss is always limited to the premium paid.