The strike price is the future set price at which the derivative contract is to be traded on a pre-decided date. There are two types of options contracts, mainly call and put options. In the call options, the strike price is referred to the cost at which the asset is bought. While for put options, the strike price is the cost at which the asset is sold.
Let us understand this with an example: Suppose an investor wants to buy a call option for a stock that is trading at Rs. 300 and is available at a strike price of Rs. 280. This insinuates that the seller believes the stock price will go down in the future so to avoid major losses he wants to sell at a strike price of Rs. 280.Whereas there is another investor who did the stock analysis and believes that the stock price will surge in the coming future. He thinks that the stock price may go up to Rs. 350.
The strike price decided by the seller will be the cost at which the stock will be sold on the date when the contract expires. So, if the market goes up and the stock price becomes Rs. 310 then the buyer will yield profit as he buys the stock at a lesser price according to the contract which is Rs. 280.Similarly, if the stock price goes down up to Rs. 250 then the seller makes a profit by selling at the strike price of Rs. 280.