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Exercise Price

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Exercise or Strike Price is the price at which a financial asset is bought or sold (usually a financial option ), and that's already defined by the issuer of this option.

Determinants of the exercise price (Strike)

The exercise price is compared with the market price and will be the turning point from which the investor will see the value of the option. In this way, the investor won't generate profits until he makes a game of addition or subtraction (depending on whether it's a long position or short position ) of the strike to the premium or the cost paid for that option. This barrier of benefits is called break even and it's the threshold from which the investor will start to have benefits.

Therefore, it'll be very important to see if the option is found (ITM, ATM, OTM), since the price of the premium will vary considerably depending on these variables.

- In the money.
- At the money.
- Out of the money.

In turn, the issuer can offer different strikes at different prices and it'll be the investor who decides which of them is of his convenience.

Example exercise price (Srike)

Assume 1 Call contract on the telephone company with strike price of 9.70 $ and a premium of 0.50 $ per option. Imagine, in turn, that Telefonica's share is trading at 9.50 $. The investor decides to buy the call, but its break even or its threshold from which it'll not start to have benefits won't be until it reaches the next level:

BreakEven = 9.70 + 0.50 = $ 10.20

We must bear in mind that we must add the premium paid to the strike price, that is, 9.70 plus 0.50 $, for a total of 10.20 $. Recall that the share is trading at 9.50 $. Therefore, the investor is far from his break even, perhaps it would not be a good option to have bought the call option.


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