Exercise Price

What Is an Exercise Price?

An exercise price is the fixed price at which the holder of an option can buy or sell the underlying asset if they choose to exercise the contract. It is set when the contract is created and is also called the strike price. For a call option, it is the price the holder can pay to buy the asset. For a put option, it is the price the holder can receive for selling it.

How It Works

Whether exercising makes sense depends on how the exercise price compares with the current market price of the underlying asset. A call option has value when the market price is above the exercise price, because the holder can buy at the lower agreed price. A put option has value when the market price is below the exercise price, because the holder can sell at the higher agreed price. An option with a favorable exercise price relative to the market is in the money, while one with an unfavorable exercise price is out of the money.

For standard listed options, the exercise price stays the same for the life of the contract. It can change only through adjustments for events such as a stock split, which are governed by the contract terms and exchange rules.

Example

Consider a hypothetical call option that gives the holder the right to buy 100 shares at an exercise price of 50 dollars per share. If the shares trade at 60 dollars, exercising lets the holder buy at 50, which gives an intrinsic value of 10 dollars per share before accounting for the premium paid for the option. If the shares trade at 40 dollars, exercising would not be useful, and the option would generally be allowed to expire unused. This example is for illustration only and does not reflect any actual security.

Why It Matters to Investors

The exercise price is one of the main factors in an option's value, along with the time remaining until expiration, the volatility of the underlying asset, and prevailing interest rates. For a call option, the breakeven point at expiration equals the exercise price plus the premium paid. Employee stock options use the same concept: the exercise price is what the employee pays to buy shares under the plan. Comparing exercise prices helps explain why two options on the same asset can have very different costs and risks.