In the case of an option contract, the "strike price" is the predetermined and agreed-upon price at which a specific security may be bought (by the call option holder) or sold (by the put option holder) until or upon the expiration of the contract. The term "strike price" is also termed as "exercise price."
Options are derivatives that offer their buyers a right, or an option—but not an obligation—to buy or sell a security, such as a stock at a specific price (or the strike price) until or on a certain date (the expiration date).
Buying or selling an options contract is referred to as exercising an option. American-style options can be exercised any time after they are purchased until their expiry date, while European-style options can only be exercised on their maturity.
Options are classified by the nature of strike prices. Strike prices may be above, below, or equal to the current market value of the underlying asset. In other words, options are categorized depending on whether or not they have intrinsic value.
Since the spot prices (market values) change over time, but strike prices do not, an option’s intrinsic value may change over the course of its contract. An option may fall in one of the following categories −
If the strike price of an option is such that the option could be exercised for a profit or gain, the option is considered "in the money."
If the strike price of an option is equal to the current market value or the spot price, that option is considered "at the money" because exercising it will allow the holder to buy or sell the underlying asset at the same price as on the open market.
Practically, there is no reason for the asset holder to exercise an option when it is "at the money". In fact, there would be a little loss if the option is sold "at the money", as a small cost is associated with purchasing an option.
If an option leads to a loss of money if exercised, that option is considered "out of the money." There would be no practical reason in exercising an OTM option, but some buyers might hold an OTM option in the hopes that the value of the underlying asset would turn positive and in their favor before the expiration of the contract.