Exercise Price

Every stock option has an exercise price, also called the strike price, which is the price at which a share can be bought. In the US, the exercise price is typically set at the fair market value of the underlying stock as of the date the option is granted, in order to comply with certain requirements under US tax law.

If the price of the underlying share of stock is above the exercise price of an option, it is “in the money” because profit can be derived from exercising the option.

If the price of the underlying share of stock is below the exercise price of an option, it is “out of the money” and will not be exercised because exercising it will result in a loss.