What is Excersise Price?

754 reads · Last updated: December 5, 2024

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 is the price at which an investor can buy or sell the underlying security when trading call or put options. Also known as the exercise price, 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 concept of the strike price originated with the development of the options market. Options trading can be traced back to the 17th-century Dutch tulip mania, but the modern options market rapidly developed after the Chicago Board Options Exchange was established in 1973. The strike price, as a core element of an options contract, has since become a part of standardized options contracts.

Categories and Features

Strike prices can be categorized mainly into call and put option strike prices. The strike price for a call option is the price at which an investor can buy the underlying asset upon option expiration, while for a put option, it is the price at which the investor can sell the asset. The choice of strike price affects the intrinsic and time value of the option, influencing its pricing and investment strategy.

Case Studies

A typical case involves options trading for Apple Inc. Suppose an investor buys a call option with a strike price of $150. If Apple's stock market price is $160, the investor can purchase the stock at $150, realizing a profit of $10 per share. Another case is Tesla Inc.'s put option, where the strike price is $700. If the market price falls to $680, the investor can sell the stock at $700, gaining a profit of $20 per share.

Common Issues

Common issues investors face with strike prices include how to choose the appropriate strike price and the impact of the strike price on option value. Selecting the right strike price requires considering market trends, the volatility of the underlying asset, and the investor's risk tolerance. A common misconception is that a lower or higher strike price is always better; in reality, the appropriate strike price should align with the investment strategy and market expectations.

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