In other words, the value of a Derivative Contract is derived from the underlying asset on which the Contract is based. Thus the exercise price or strike price is the key variable between two parties in a derivative contract Derivative Contract Derivative Contracts are formal contracts entered into between two parties, one Buyer and the other Seller, who act as Counterparties for each other, and involve either a physical transaction of an underlying asset in the future or a financial payment by one party to the other based on specific future events of the underlying asset. With time the entire range of strike prices may expand beyond initially listed boundaries because of the large market movements.

When the person is trading in options, he can choose out of the different strike price ranges that are predetermined by the exchange.

It is beneficial to exercise the option if the strike price is below the underlying security market price in case of the call option or if the strike price is above the market price, then one should exercise the option in case of a put option.

If the buyer uses the right, then they are said to be exercising the option. While trading in options, the buyer of the option contract needs to pay the cost of buying the option, which is known as premium.So the investor has a loss equal to the option premium paid by him, i.e., $250.If the price of the stock is at or out of the money, then the loss is always limited to the option premium paid. Here the market price of the stock is at par with the strike price. At the expiration of the contract, the Stock is Trading at $50.As the investor has paid a premium of $250 so he has to book a loss of $150 ($250 – $100). Here, the exercise price is very near to the stock market price. Using a similar analysis done above, the worth of the call option will be $2 per share or $100 in totality. At the expiration of the contract, the Stock is Trading at $52.In contrast, the seller or writer of the option has no choice but obligated to deliver or buy the underlying asset if the option is exercised. Hence, the net profit for the above transaction is $750, as a premium of $250 premium was paid while purchasing the option contract Option Contract An option contract provides the option holder the right to buy or sell the underlying asset on a specific date at a prespecified price. Now the investor will purchase the shares at $50 per share, spending a total of $2500 ($50*50), and then sell them at $60 per share getting $3500 ($60*50), making a profit of $1000. Here the exercise price is below the market price the option is said to be in the money. In this scenario, the investor has the right to purchase the call option at $50, and then he can immediately sell the same at $60. At the expiration of the Contract, Intel Corporation Stock is Trading at $60.Now, if the market price of the shares rises to $ 40, then the holder of the option to purchase the shares at the rate of $ 20 and can book a profit of $ 20,000 as it allows him to sell the shares at the rate of $ 40 per share getting $ 40,000 after buying it at the rate of $ 20 per share spending $ 20,000. If, for example, an investor purchased a call option of 1000 shares of an XYZ company at a strike price of $ 20, then say he has the right to purchase 1000 shares at the price of $ 20 till the date of expiration of the call option period no matter what the market price is. Let’s see some simple to advanced examples of the exercise price to understand it better. At the Money: If the exercise price is the same as the market price of the underlying stock, then at that time, both the call and the put options are at the money At The Money ATM refers to a situation in which the option holder's exercise of the option results in no loss or gain since the exercise price or strike price is equal to the current spot price of the underlying security.Out of the Money: Incall option, if the exercise price of the underlying security is above its market price, then the option is said to be as ‘out of the money’ whereas in the put option, if the strike price is below the market price of the security, then it is said to be as ‘out of the money.’.

In the Money: In the case of a call option, the option is said to be ‘in the money’ if the market price of the underlying stock is above the exercise price and In case of a put option, if the market price of the stock is below the strike price then it is considered as ‘in the money.’.There are other terms related to exercise price

Strike price