Strike price

Definition: The price at which the owner of an option can call shares away from (or put shares to) the investor who sold him the option.

Example: Ammar bought a call option giving him the ability to purchase from the call seller shares of Camro Corp. for $25 any time between now and next April. The company’s shares are currently trading for $20. Because $25 is the strike price, it will not be worth Ammar exercising his call option unless the market price of the shares rises above $25.

Investeach explains: For a specific company, there are usually many options to address the different possible combinations of strike prices and expiration dates.  In the above example, Ammar could have bought a call option with a strike of $27.50. It is less likely for the stock to rise to this higher price by next April, so the cost of this call option will be less than the one with the $25 strike price.

Riddle me this:

1. Who will the owner of a call option pay the strike price to when he exercises his option and wishes to own the shares?
2. What will the stock price have to be relative to the strike price for it to be worthwhile for a call owner to exercise his option?

Also known as: Exercise price.