Generally speaking, it is the price at which a derivative contract can be exercised by the holder or the buyer. In connection with options, it refers to the price at which the underlying asset may be bought or sold. For example, a call option buyer can buy the underlying or a put option buyer can sell the underlying at the strike price specified in the contract.

The profit that can be made by an option’s holder upon exercising is the difference between the spot price and the strike price (for a call option) or the amount by which the strike price exceeds the spot price (for a put option). The option premium is generally proportionate to the difference between the spot price and the strike price. At expiration, if the price of the underlying is above the strike price, the buyer (option holder) would exercise the option (which is said to be in the money), with the gains (payoff) to the buyer being the price of its underlying minus the strike price. On the contrary, if the price of the underlying is below the strike price, the buyer will not exercise the option (as it is said to be out-of-the-money), and payoff would be zero.

The holder of a call option has the potential for unlimited gains if the underlying ends up above the strike price, over the span of the option’s life including expiration date (for an American option/ American-style option) or only at expiration date (for a European option/ European-style option). Moreover, the holder of a call will lose nothing but the price (option premium) if the underlying ends up below the strike price at expiration.

The strike price is also called the exercise price.