The exercise price, also known as the strike price, is the price at which a specific derivative contract can be exercised. Derivatives are financial contracts that derive their value from an underlying asset. These assets may include stocks, bonds, commodities, and more.
In terms of options trading, the exercise price is the predefined price at which the owner of an option can buy or sell the underlying asset in the future. For a call option, the exercise price is the price at which the asset can be bought. For a put option, it is the price at which the asset can be sold. The exercise price is decided upon when the contract is formed.
Related Questions
1. What is a call option?
A call option is a contract that gives a buyer the right, but not the obligation, to buy a stock, bond, commodity or other asset at a specified price within a specific time period.
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2. What is a put option?
A put option, on the other hand, is a contract that gives the owner the right, but not the obligation, to sell a specified amount of an underlying asset at a set price within a specified time.
3. What do you mean by an underlying asset?
An underlying asset is a financial term used in derivatives trading. It refers to the actual asset on which the derivatives contract is based. It could be stocks, bonds, currencies, indices, commodities, etc.
4. How is the exercise price determined?
The exercise price is decided upon when the contract is first formed. It’s typically at or near the market price of the asset at the time the option is written.
5. Does the exercise price change?
No, the exercise price does not change during the life of the option. It remains fixed regardless of the changes in the market price of the underlying asset.