Exercise Price
The exercise price is the agreed price of an option contract, which is the agreed price of the underlying asset specified in the option contract at a certain point in the future. The exercise price is the price agreed upon by the two parties in the option contract and is also an important parameter in option trading.
Definition: The strike price, also known as the exercise price, is the agreed-upon price in an options contract at which the underlying asset can be bought or sold at a future date. It is a crucial parameter in options trading, determined by the buyer and seller of the options contract.
Origin: The concept of the strike price originated with the development of the options market. While options trading dates back to ancient Greece and Rome, the modern options market began in the 1970s. The establishment of the Chicago Board Options Exchange (CBOE) in 1973 marked the formal introduction of standardized options contracts and strike prices.
Categories and Characteristics: Strike prices can be categorized as follows:
- Call Option Strike Price: This is the price at which the holder of a call option can purchase the underlying asset when the option is exercised.
- Put Option Strike Price: This is the price at which the holder of a put option can sell the underlying asset when the option is exercised.
- Fixed Nature: The strike price is determined when the options contract is created and remains unchanged throughout the contract's duration.
- Impact on Option Value: The strike price directly affects the intrinsic value and time value of the option, thereby influencing its market price.
Examples:
- Example 1: Suppose an investor buys a call option with a strike price of $50. If the underlying stock price rises to $60 at expiration, the investor can buy the stock at the $50 strike price and sell it at the $60 market price, earning a $10 profit per share.
- Example 2: Suppose an investor buys a put option with a strike price of $40. If the underlying stock price falls to $30 at expiration, the investor can sell the stock at the $40 strike price and buy it back at the $30 market price, earning a $10 profit per share.
Common Questions:
- What is the difference between the strike price and the market price? The strike price is the price specified in the options contract, while the market price is the current trading price of the underlying asset in the market.
- How does the strike price affect the value of an option? The closer the strike price is to the market price of the underlying asset, the higher the intrinsic value of the option, and vice versa.
