Option trading is a complex financial operation that grants the buyer the right to buy or sell an underlying asset at a predetermined price at a specific time. The strike price, also known as the exercise price, is the price specified in the option contract at which the underlying asset can be bought or sold. Selecting the appropriate strike price is crucial for option trading, as it directly affects the option's intrinsic value, time value, and the investor's potential profit or loss.

Selecting the Strike Price

Several factors influence the selection of a strike price:

1. Market Expectation: If the investor anticipates the underlying asset's price to increase, they should choose a lower call option strike price. Conversely, if they expect the price to decrease, a higher put option strike price is preferred.
2. Risk Tolerance: In-the-money options (call options with a strike price below the current underlying asset price or put options with a strike price above the current price) have intrinsic value but higher premiums, resulting in relatively lower risk. Out-of-the-money options (call options with a strike price above the current underlying asset price or put options with a strike price below the current price) have lower premiums but higher risk.
3. Investment Objective: Different investment objectives warrant different strike prices. For example, investors seeking higher returns might choose out-of-the-money options, while those aiming to reduce risk might choose in-the-money options.

Impact of Different Strike Prices on Profitability

• In-the-money Options:

In-the-money options have a strike price lower than the underlying asset's current market price (for call options) or higher than the current market price (for put options). These options have intrinsic value, hence higher premiums. When the market price rises above the strike price, call option holders can purchase the asset at the lower strike price, thereby making a profit. Similarly, when the market price falls below the strike price, put option holders can sell the asset at the higher strike price.

• At-the-money Options:

At-the-money options have a strike price equal to the underlying asset's current market price. These options have no intrinsic value, only time value. Their break-even point is the strike price plus the paid premium. At-the-money options might become valuable at expiration depending on market price movements.

• Out-of-the-money Options:

Out-of-the-money options have a strike price higher than the underlying asset's current market price (for call options) or lower than the current market price (for put options). These options have no intrinsic value, only time value, and lower premiums. Out-of-the-money options typically have no exercise value at expiration as they require significant adverse market movements to become in-the-money.

Real-World Case

Consider an investor trading options on Apple Inc. (AAPL) with a current stock price of $150. The option status at different strike prices is as follows:

（Source: uSMART HK）

In this example, if the investor bought the call option with a strike price of $140, the option would be in-the-money, having an intrinsic value of $10.00. If they chose to exercise, they could buy AAPL stock at $140 and then sell it at the market price of $150, making a profit of $10 per share.

Conversely, if the investor bought the call option with a strike price of $160, the option would be out-of-the-money, having no intrinsic value. Unless the market price rises significantly, this option might not be exercised, and the investor would lose the entire premium.

Conclusion

Choosing the right strike price is critical for successful option trading. In-the-money options, while more expensive, offer greater security; out-of-the-money options, while cheaper, carry higher risks. Investors should choose the appropriate strike price based on their market expectations, risk tolerance, and investment objectives.