Financial Tips: Understanding Stock Options' Strike Price, Exercise and Expiration Date

Options are a loan contract given to an investor or investors so they may leverage their financial position to a greater level. An options contract allows the investor to purchase a large volume of securities on 'margin' at a proportionally lower but representative price with the knowledge that (s)he may have to pay back the financial institution if the option does not perform the way the investor intended. Unlike regular stock trading, options are traded with the intent and choice of either selling or buying the underlying securities within the options contract. In other words, the options trader has an option or choice regarding how money is intended to be made i.e either a rise or decline in the security. There is a fair amount of financial lingo associated with options trading but three of the more important and fundamental terms are strike price, expiration date and exercise.

Strike Price:

Options are traded as 'calls' or 'puts' a call option is purchased with the intent to purchase the stocks in the option. This future purchase price is called the strike price and is different from the option price. If the price of a stock goes up during the term of the option, the trader or investor may get a deal having locked into a lower strike price. An option strike price may also be a sell price in the case of a 'put'. This is also called short selling as the trader is betting the stock will go down during the term of the option. For example, if a trader buys a put option of Pear Inc. with a strike price of $55.67 and the price of Pear Inc. drops during the term of the option, the trader can then sell the option at the strike price of $55.67 and make a profit if the option cost was lower than the strike price.

Expiration Date: