Strike Price – What is it?
The amount of premium paid to purchase a put or a call depends upon the strike price that is chosen. A strike price is similar to the deductible that you pay for health or car insurance, the higher the deductible, the cheaper the premium. For instance, if December corn futures are trading at $5.00, a put option may cost 30 cents. This gives you a breakeven of $4.70 for your corn. If you consider this protection too expensive, a $4.50 put may cost 10 cents giving you a breakeven of $4.40. Keep in mind the lower the strike price, the cheaper the premium as well as the level of protection.
If the underlying futures and the option strike price are the same, the option is referred to being at-the-money. A put option is out-of-the-money if the futures price is above the option strike price. A put option is in-the-money if the futures price is below the option strike price. The opposite applies to call options.