When it comes to options trading, the strike price plays a critical role in determining the value or premium of an option. For call options, a lower strike price means that the option is more likely to end up in the money, which generally translates to a higher premium.
To understand this better, consider a call option: it gives the holder the right to buy an asset at the strike price. If the strike price is lower than the current market price of the underlying asset, it’s advantageous for the holder, as they can purchase the asset for less than its market value. This increased likelihood of profitability drives up the premium that buyers are willing to pay for the option.
On the flip side, with put options, which provide the right to sell an asset at the strike price, a lower strike price means that the option is less likely to be exercised profitably if the market price is above the strike price. The lower the strike price, the smaller the difference between the market price and the strike price, making it less attractive to potential buyers. Thus, the premium for put options tends to decrease as the strike price gets lower, reflecting this reduced demand.
In summary, a lower strike price enhances the appeal of call options due to increased potential for profit, leading to a higher premium. Conversely, for put options, a lower strike price diminishes profitability potential, resulting in a lower premium.