Legal Definitions - exercise price

The exercise price, also commonly referred to as the strike price, is the predetermined price at which the holder of an options contract can buy or sell the underlying asset. This price is established when the option contract is created and remains fixed for the duration of the option's life. When an option holder chooses to "exercise" their option, they are activating their right to transact the underlying asset at this specific exercise price, irrespective of its current market value.

• Example 1: Investor Buying a Call Option

  An investor purchases a call option for shares of "Quantum Innovations Inc." The option grants them the right to buy 100 shares of Quantum Innovations stock at a price of $75 per share, at any time before the option expires. If, before expiration, the market price of Quantum Innovations stock rises to $100 per share, the investor can choose to exercise their option. They would then buy the shares for $75 each, immediately gaining from the difference between the market price and the exercise price.

  In this scenario, $75 per share is the exercise price. It is the fixed cost at which the investor can acquire the stock by using their option.

• Example 2: Employee Stock Options

  Maria, a senior manager at "FutureTech Solutions," receives a grant of employee stock options as part of her compensation package. These options give her the right to purchase 5,000 shares of FutureTech Solutions stock at $30 per share, after a three-year vesting period. Three years later, the company's stock has performed well, and its market price is now $80 per share. Maria decides to exercise her options.

  Here, $30 per share is the exercise price. This is the discounted, predetermined price at which Maria can buy her company's stock, allowing her to benefit from the increase in the stock's market value since the options were granted.

• Example 3: Investor Buying a Put Option

  An investor believes that the stock price of "Global Logistics Corp." might decline. To protect against potential losses on shares they already own, or to profit from a downturn, they purchase a put option. This option gives them the right to sell 200 shares of Global Logistics Corp. at a price of $60 per share, before a specific date. If the stock price drops to $45 per share, the investor can exercise their put option.

  In this case, $60 per share is the exercise price. By exercising the option, the investor can sell their shares at $60 each, even though the market price is only $45, thereby limiting their losses or generating a profit from the price drop.