Spot and strike prices are commonly used in financial markets, particularly in the context of options and futures trading. Understanding these two concepts is essential for investors who want to participate in these markets.

Spot Price: Spot price refers to the current market price of a particular asset, such as a commodity, currency, or stock. It is the price at which an asset can be bought or sold for immediate delivery, meaning that the transaction is settled immediately after the trade is executed. For example, the spot price of gold is the current price at which gold can be bought or sold for immediate delivery.

A range of factors, including supply and demand, market sentiment, and geopolitical events, influences an asset's spot price. In many cases, the spot price serves as a benchmark for pricing derivatives, such as options and futures contracts.

Strike Price: Strike price, on the other hand, refers to the price at which an option contract can be exercised. An option is a contract that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a specific price (the strike price) within a specified period of time. Call options and put options are the two types of options.

A call option entitles the holder to purchase the underlying asset at the strike price, whereas a put option entitles the holder to sell the underlying asset at the strike price. When the option contract is created, the strike price is fixed and remains constant until the contract expires.

The strike price is an essential component of an option contract because it determines the potential profit or loss that can be made by the holder of the contract. If the spot price of the underlying asset is higher than the strike price of a call option, the holder can exercise the option and buy the asset at the lower strike price, making a profit. Conversely, if the spot price is lower than the strike price, the holder may choose not to exercise the option and allow it to expire, incurring a loss.

Similarly, if the spot price of the underlying asset is lower than the strike price of a put option, the holder can exercise the option and sell the asset at the higher strike price, making a profit. Conversely, if the spot price is higher than the strike price, the holder may choose not to exercise the option and allow it to expire, incurring a loss.

The connection between the spot price and the strike price is crucial in determining the value of an option contract. The value of a call option increases as the spot price of the underlying asset rises above the strike price, while the value of a put option increases as the spot price falls below the strike price. The closer the spot price is to the strike price, the lower the option contract's value.

Conclusion

Spot price and strike price are fundamental concepts in options and futures trading. The spot price is the current market price of an underlying asset, while the strike price is the price at which an option contract can be exercised. The relationship between these two prices is essential in determining the potential profit or loss that can be made by an investor in these markets.