What is Strike Prices?
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Exercise price refers to the price at which the underlying asset specified in an options contract can be bought or sold. For a call options contract, the exercise price is the price at which the underlying asset can be bought, while for a put options contract, the exercise price is the price at which the underlying asset can be sold. The exercise price is usually related to the expiration date of the options contract. Before the expiration date, investors holding options can choose whether to exercise the options to buy or sell the underlying asset. The choice of exercise price has a significant impact on the profitability and loss of the options, and investors will determine the exercise price based on market expectations and risk preferences.
Definition
The exercise price, also known as the strike price, is the price at which the underlying asset can be bought or sold as specified in an options contract. For call options, the exercise price is the price at which the asset can be purchased; for put options, it is the price at which the asset can be sold. The choice of exercise price significantly impacts the profitability and loss of the option.
Origin
The concept of options dates back to ancient Greece, but the modern options market began with the establishment of the Chicago Board Options Exchange in 1973. The exercise price, as a core element of options contracts, has since become a crucial part of financial markets.
Categories and Features
Exercise prices can be categorized into fixed and floating exercise prices. A fixed exercise price is determined at the time of contract signing and does not change with market fluctuations. A floating exercise price may adjust based on market conditions. The advantage of a fixed exercise price is its high certainty, while a floating exercise price may offer greater flexibility.
Case Studies
Case 1: In Apple Inc.'s options trading, an investor chose a call option with an exercise price of $150. When Apple's stock price rose to $160, the investor exercised the option to buy the stock at $150, thus making a profit. Case 2: In Tesla Inc.'s put option, the exercise price was $600. When Tesla's stock price fell to $580, the investor exercised the option to sell the stock at $600, avoiding a larger loss.
Common Issues
Investors often struggle with selecting the appropriate exercise price. Typically, the choice should be based on market expectations and personal risk preferences. A common misconception is that a lower exercise price is always better, but in reality, the exercise price should align with the investment strategy.
