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The exercise price, or strike price, is the price at which the owner can exercise an option. A call entitles the holder to buy the underlying asset at the exercise price, and a put entitles the owner to sell the underlying at the exercise price. If the the market price is significantly above the exercise price, the option can be exercised at a profit. If the the market price is significantly below the exercise price the investor must consider the impact of transaction costs in determining whether it is worthwhile to exercise the option. The exchange decides the exercise price increment for a given option series based on the price of the asset as well as the actual choices of exercise price available for that asset. For example, on a stock trading at $52.50, the exchange may initiate a new option series at one exercise price above and one below, say $50 and $55. If the stock price passes $55, options at the $60 exercise price will be offered. |
