What It Is:
The strike price is the specified price at which an option contract can be exercised.
How It Works/Example:
Strike prices are fixed in the option contract. For call options, the option holder has the right to purchase the underlying stock at that strike price up to the expiration date. For put options, the strike price is the price at which the underlying stock can be sold.
For example, an investor purchases a call option contract on of ABC Company at a $5 strike price. Over the life of the option contract, the holder has the right to exercise the option and purchase 100 shares of ABC for $500. If the price of ABC shares rises to $10, the option holder can lock in a $500 by exercising the option because it allows him to buy shares at $5 and sell them for $10 in the open market.