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Simple English definitions for legal terms
exercise price
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A quick definition of exercise price:
Exercise price is the price at which an option can be bought or sold. It is also known as the strike price. When an investor exercises an option, they are buying or selling the underlying asset at the exercise price. For example, if an investor has a call option with an exercise price of $50 and the underlying stock is currently trading at $60, the investor can exercise the option and buy the stock at $50, making a profit of $10 per share.
A more thorough explanation:
The exercise price, also known as the strike price, is the price at which an option can be exercised. It is the price at which the owner of an option can buy or sell the underlying asset.
For example, let's say you own a call option on XYZ stock with an exercise price of $50. This means that you have the right to buy XYZ stock at $50 per share. If the current market price of XYZ stock is $60, you can exercise your option and buy the stock at the exercise price of $50, making a profit of $10 per share.
Similarly, if you own a put option on XYZ stock with an exercise price of $50, you have the right to sell XYZ stock at $50 per share. If the current market price of XYZ stock is $40, you can exercise your option and sell the stock at the exercise price of $50, making a profit of $10 per share.
The exercise price is an important factor in determining the value of an option. The closer the exercise price is to the current market price of the underlying asset, the more valuable the option is.