Strike price logic refers to the systematic methodology employed by exchanges or option market makers to determine and list the available exercise prices (strike prices) for options contracts on an underlying asset. This logic influences liquidity, pricing efficiency, and strategic flexibility for traders.
Mechanism
Exchanges typically establish a standardized framework for strike price intervals, which may vary based on the underlying asset’s price level, volatility, and time to expiry. For example, options on a low-priced asset might have dollar-wide strike increments, while high-priced or highly volatile assets might feature wider intervals. This system ensures a continuum of available contracts around the current market price, often dynamically adjusting as the underlying asset moves.
Methodology
The strategic implication of strike price logic for options traders involves selecting contracts that align with their market expectations and risk tolerance. Market makers rely on consistent strike intervals to manage their books efficiently and provide continuous liquidity. This standardized approach facilitates transparent price discovery and enables the construction of various options strategies, from simple directional bets to complex spreads, within a structured framework.
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