what is an exercise price 
the exercise price is the price at which an underlying security can be purchased or sold when trading a call or put option respectively it is also referred to as the strike price and is known when an investor initiates the trade an option gets its value from the difference between the fixed exercise price and the market price of the underlying security understanding exercise prices exercise price is a term used in derivatives trading a derivative is a financial instrument based on an underlying asset options are derivatives while the stock for example refers to the underlying security in options trading there are calls and puts and the exercise price can be in the money itm or out of the money otm a call option would be itm if the exercise price is below the underlying security s price and otm if the exercise price is above the underlying security s price the converse would hold for a put option a put gives investors the right but not the obligation to sell a stock in the future investors buy puts if they think the stock is going down or if they own the stock and want to hedge against a possible price decline they buy puts because it allows them to sell the stock at the strike price of the option even if the stock falls dramatically a call meanwhile gives investors the right but not the obligation to buy a stock in the future investors buy calls if they think the stock is going up in the future or if they sold the stock short and want to hedge against a possible surge in price calls give them the right to buy at the strike price even if the stock price rallies aggressively typically put option investors only exercise their right to sell their shares at the exercise price if the price of the underlying is below the strike price likewise call options are usually only exercised if the price of the underlying is trading above the strike price exercise price examplelet s assume that sam owns call options for wells fargo company with an exercise price of 45 and the underlying stock is trading at 50 this means the call options are trading itm the exercise price is lower than the price at which the stock is currently trading by 5 the call options give sam the right to buy the stock at 45 even though it s trading at 50 allowing him to make 5 per share by exercising the option sam s profit would be 5 less the premium or cost he paid for the option if on the other hand wells fargo is trading at 50 and the strike price of sam s call option is 55 that option is otm it would not be beneficial for sam to exercise that option because there is no need to pay 55 using the option when he can currently buy the stock for 50 example of the exercise price strike price in wells fargo options tablethe further otm an option moves the less valuable it gets it only has extrinsic value or value based on the possibility that the price of the underlying could move through the strike price meanwhile the further itm an option is the more value it has giving sam a better price than what is available in the stock market or another underlying market 