Legal Definitions - striking price

The striking price (also commonly referred to as the strike price) is a predetermined price at which an underlying asset can be bought or sold if an options contract is exercised. It is a fundamental term within an options agreement, establishing the specific price point at which the transaction will occur in the future, regardless of the asset's market price at the time of exercise.

Here are a few examples to illustrate the concept:

• Employee Stock Options: Imagine an employee receives stock options as part of their compensation package. Their contract grants them the right to purchase 1,000 shares of their company's stock at a striking price of $50 per share, exercisable after a certain vesting period. If, after the vesting period, the company's stock price rises to $75 per share, the employee can choose to exercise their option. They would then buy the shares at the $50 striking price, even though the market value is $75, potentially allowing them to sell them immediately for a profit.

• Investor Hedging with Commodities: A large food manufacturer wants to protect itself from potential spikes in the price of corn, a key ingredient. They purchase an options contract that gives them the right to buy 50,000 bushels of corn at a striking price of $4.50 per bushel, valid for the next six months. If, during that six-month period, the market price of corn jumps to $5.00 per bushel due to a poor harvest, the manufacturer can exercise their option. They would then buy the corn at the pre-agreed $4.50 striking price, saving money compared to buying it at the higher market rate.

• Real Estate Development: A property developer identifies a piece of land they might want to acquire for a future project, but they need time to secure financing and permits. They enter into an agreement with the landowner to purchase an option to buy the land within the next two years at a striking price of $1 million. This means that for the next two years, regardless of whether property values in the area increase significantly, the developer has the right to buy that specific piece of land for $1 million (the striking price) if they choose to exercise their option.