Exercise Price

Key Highlights

• The exercise price, also known as the strike price, is the predetermined rate at which the holder of an option can purchase (in the case of a call option) or sell (in the case of a put option) the underlying asset, such as a stock or commodity.

• This price is established when the option contract is issued and remains unchanged until expiration.

What is Exercise Price?

The exercise price, also known as the strike price, is the predetermined rate at which the holder of an option can purchase (in the case of a call option) or sell (in the case of a put option) the underlying asset, such as a stock or commodity. This price is established when the option contract is issued and remains unchanged until expiration

Why It Matters in Options Trading?

• Determines Profitability: If the market price moves favorably- rising above the strike for a call option or falling below it for a put- you can potentially earn a profit by exercising the option.

• Fixed Benchmark: It’s a steady reference point to compare against the asset’s current market price, helping you gauge the option’s value and risk.

What Affects the Exercise Price?

• Market Swings: The exercise price may reflect how much the asset’s price tends to move or its expected changes.

• Rules and Taxes: In employee stock options, the exercise price is often set close to the stock’s market value at the time of the grant to meet tax or legal rules.

• Time Factor: Options lasting longer might have exercise prices set with future price expectations in mind, often using models like Black-Scholes.