Call Option Structure

• A call option is defined by the underlying stock, the expiration date and the strike price. The strike price is the price the option holder will pay for the underlying stock if he elects to exercise the contract. For example, if a trader owns a Microsoft call option with a strike price of $25 and exercises the contract, he will buy Microsoft for $25 per share. The idea is to have Microsoft be worth more than $25, giving the call option value. Each option contract is for 100 shares of the underlying stock.
  
  

Changing Strike Prices

• The strike price of an option contract does not change. Each stock has a range of call options trading with different strike prices. For example, Microsoft call options are available with strike prices in one dollar increments from $15 to $35. As the strike price for different options gets higher, the price of the option contract will decrease. Call options with strike prices above the current stock price are less valuable than call options with strike prices below the current stock price.
  
  

Changing Stock Prices

• The value of a call option increases as the underlying stock price increases. If the call option strike price is well above the stock price, the value change in the option price is small. If the stock price is near or above the strike price, the option price will change dollar for dollar with the upward gains of the stock price. As noted, each option contract is for 100 shares of stock, so a $1 stock price gain is worth $100 on the option contract if the stock price is above the strike price.
  
  

Strike Price Terminology

• The relationship between the strike price of a call option and the current price of the underlying stock is described by several widely used option terms. If the stock price is above the call option strike price the option is in-the-money -- ITM -- and has intrinsic value. If the stock price is below the call option strike price the contract is out-of-the-money -- OTM. If the stock price is at the same level as the strike price of the option, the option is at-the-money -- ATM.