What is Exercise Price?

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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 is the agreed-upon price in an options contract, specifying the price at which the underlying asset can be bought or sold at a future date. It is a crucial parameter in options trading, agreed upon by both parties in the options contract.

Origin

The history of options trading dates back to ancient Greece and Rome, but the modern options market began in the 1970s. The establishment of the Chicago Board Options Exchange (CBOE) in 1973 marked the start of standardized options contracts, with the strike price being formally established as a core element of these contracts.

Categories and Features

Strike prices can be categorized into call options and put options. In call options, the strike price is the price at which the buyer can purchase the underlying asset at a future date. In put options, it is the price at which the seller can sell the underlying asset at a future date. The choice of strike price affects the intrinsic and time value of the option, influencing its pricing and investment strategy.

Case Studies

Case Study 1: In Apple Inc.'s options trading, suppose an investor buys a call option with a strike price of $150. If Apple's stock price exceeds $150 at expiration, the investor can buy the stock at $150, making a profit. Case Study 2: In Tesla Inc.'s options trading, an investor buys a put option with a strike price of $600. If Tesla's stock price is below $600 at expiration, the investor can sell the stock at $600, making a profit.

Common Issues

Common issues investors face with strike prices include how to choose the appropriate strike price and its impact on the option's value. Generally, the choice should be based on the expected price movement of the underlying asset and investment goals. The closer the strike price is to the current market price of the underlying asset, the higher the intrinsic value of the option, but the time value may be lower.

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