Strike Price (Exercise Price)

In our example, the pizza coupon states a specific purchase price of $10.00. No

matter what the price of pizzas may be when you get to the store, you are locked in

to the price of $10.00. If this were an option, we’d call this “lock in” price the

strike

price

, which is really a slang term that comes from the fact that we have “struck” a

deal at that price.

Another name for the strike price is the

exercise price. The reason for this is

that if you choose to use your option, you must submit

exercise instructions to your

broker, which is handled with a simple phone call. With a pizza coupon you just

“hand in” the coupon, but in the world of options you must “exercise” the option

through your broker.

If you exercise a call option, you must pay the strike price (since you’re buying

stock) and that’s why the strike price is also called the exercise price. It’s the price

you will pay for exercising the option to purchase shares of stock. If you are short

a call option, you’ll receive the strike price (because you’re selling stock). The

exercise price is the price that will be paid by the long position and received by

the short position.

The opposite is true for put options. If you exercise a put, you’ll receive the

strike price since you are selling shares of stock. The short put will pay the strike

price since he is the required to buy the stock. The exercise price is the price that

will be received by the long put and paid by the short put.

We’ll talk more about exercising options later but, for now, just understand

that the strike price and exercise price are two terms meaning the same thing. They

both represent the fixed purchase or selling price.