Excersise Price
The exercise price is the price at which an underlying security can be purchased or sold when trading a call or put option, respectively. It is also referred to as the strike price and is known when an investor initiates the trade.An option gets its value from the difference between the fixed exercise price and the market price of the underlying security.
Definition: The strike price, also known as the exercise price, is the price at which an investor can buy or sell the underlying security when trading call or put options. The strike price is determined when the investor initiates the trade. The value of an option depends on the difference between the strike price and the market price of the underlying security.
Origin: The history of options trading dates back to ancient Greece, but the modern options market began with the establishment of the Chicago Board Options Exchange (CBOE) in 1973. The strike price has been a core element of options contracts since the inception of the options market and has evolved with market developments.
Categories and Characteristics: The strike price can be categorized as follows:
- At-the-money (ATM) options: The strike price is equal to the market price of the underlying security.
- In-the-money (ITM) options: For call options, the strike price is below the market price of the underlying security; for put options, the strike price is above the market price of the underlying security.
- Out-of-the-money (OTM) options: For call options, the strike price is above the market price of the underlying security; for put options, the strike price is below the market price of the underlying security.
Specific Cases:
- Case 1: Suppose Investor A buys a call option with a strike price of $50, and the current market price of the underlying stock is $55. Since the market price is above the strike price, Investor A can buy the stock at $50 and sell it at the market price of $55, making a profit of $5 per share.
- Case 2: Suppose Investor B buys a put option with a strike price of $60, and the current market price of the underlying stock is $55. Since the market price is below the strike price, Investor B can sell the stock at $60 and buy it back at the market price of $55, making a profit of $5 per share.
Common Questions:
- How is the strike price determined? The strike price is determined by the parties involved in the options contract at the time of signing, and there are usually multiple strike prices to choose from.
- What is the relationship between the strike price and the value of the option? The value of an option primarily depends on the difference between the strike price and the market price of the underlying security. ITM options are generally more valuable, while OTM options have lower value.
- Does the strike price change? Once the options contract is signed, the strike price is fixed and does not change with market prices.
