Strike price vs. exercise price: What’s the difference?
Strike price and exercise price are both terms for the price at which you can buy or sell an underlying security in options trading. Both refer to the security price you locked in when you purchased the option, and investors use both terms interchangeably. However, a security could have multiple options with different strike (exercise) prices.
What does the strike price or exercise price mean?
To answer that, we first have to understand options. An option grants you the right, but not the obligation, to buy or sell a security (which could be a stock or other asset) at a specific price before a specific date. Investors use options to potentially increase their gains or to hedge risk, and if not used before the expiration date they lose all value.
When you’re trading options, the strike or exercise price is the price at which you can buy or sell the underlying security. This is called exercising your options. Traders use both strike price and exercise price to refer to the same thing: the specific price on your options contract.
The two most common types of options are call options and put options. To be “in the money” (i.e. profitable) with a call option, the price of the underlying asset must rise above the strike price before the option expires. A put option, on the other hand, is in the money when the stock price falls below the exercise price.
Remember: the strike price is not the same as the price you pay for the option contract itself. That’s called the premium. For instance, an option contract might have a $1 per share premium and a strike price of $50. For 100 shares (the typical amount in an options contract) you’d pay $100 to buy the option. You’ll want to deduct the cost of the premium when calculating your potential gains.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
