Strike price

The strike is the number written into the option contract. A call holder pays it to receive the underlying; a put holder receives it in exchange for delivering the underlying. Exercise price is the identical concept under a different name, and exercising is the act of using the right.

Where the strike sits relative to the current price gives the option its shorthand. A call struck below the share price is in the money, one struck at it is at the money, one struck above is out of the money. The same words apply to a put in reverse. An out of the money option still has value while time remains, and calling it worthless is the most common mistake in this area.

The strike does most of the work in setting the character of the instrument. On a convertible bond, the conversion price is the strike of the embedded call, and how far above the current share price it is set decides both the coupon the issuer can pay and how much dilution the issuer is agreeing to accept. On a management option pool the strike is usually set at the sponsor's entry valuation, so managers earn nothing until the sponsor's own money is repaid.

One thing the strike does not do is move. Standard adjustments exist for share splits, rights issues and some capital returns, and convertibles carry anti dilution provisions for exactly that reason, but the strike is not reset because the share price went the wrong way.