The strike price or exercise price is how much an employee will pay to exercise one share of your company's stock. The strike price is determined by the Fair Market Value (FMV) at the time the options are granted.
Why do I need to know my strike price?
Your strike price is an important piece of information about your employee stock options for 2 primary reasons: 1) exercise and taxes & 2) the value of your options.
Exercise and taxes
First of all, your strike price is used to compute the dollar amount required to exercise, as well as the tax implications of your options. To exercise, you must pay the strike price times the number of vested options you wish to exercise in exchange for your shares.
If you exercise 100 shares with a strike price of $1, you will pay $100.
Taxes are then calculated based on the spread between the current Fair Market Value (FMV) of the stock and your strike price. Taxes are calculated differently depending on which type of Employee Stock Options you have been granted.
Value of your options
Next, your strike price sets the floor where you are in the money. Basically, if the current price of the stock is greater than your strike price, your options have positive value. If the current price is less than your strike price, your options are considered under-water.
Stock Options are tough to value given their illiquid and uncertain nature, however we at ESO attempted to place value on these options here.
Example:
You have 100,000 vested options at Company X with a strike price of $1.
The current FMV of Company X stock is $3.
In order to exercise, you will need to pay $100,000 (100,000 shares x $1 per share).
Your taxable gain at exercise will be $200,000 (100,000 shares x $2 or $3 - $1). **Remember this gain will be taxed differently depending on what type of options you were granted.
In the future, if Company X goes through an IPO or M&A event, you will be able to sell your shares hopefully for an even higher price.
Where can I find my strike price?
Your strike price will be located in your stock option grant. This may be a physical piece of paper or a pdf sent by the company, but in 2022 more often than not it is located in an equity portal like Carta or Shareworks.
If you cannot locate your stock option plan or equity portal, you should reach out to whoever is in charge of stock options at your company (ex: Controller, HR, VP Finance etc).
You should also know your strike price prior to accepting your job offer. This will help you assess your option package and decide whether or not to negotiate your stock option grant.
Can my strike price be changed after my shares are granted?
It depends on the situation. There is no case where your strike price will be changed to a larger value (outside of an error at the company). In some cases when the Fair Market Value drops below your strike price (aka underwater), the company will offer to "re-price" the stock options to the new, lower value. If your options are ever underwater, it can be worth asking the company to extend this courtesy and re-price your options, though they are not obliged to do so.
If you have any questions about your strike price or option exercise, please submit our form below to talk with one of our Equity Partners.
FAQs
In finance, the strike price (or exercise price) of an option is a fixed price at which the owner of the option can buy (in the case of a call), or sell (in the case of a put), the underlying security or commodity.
What is the striking price? ›
For call options, the strike price is the price at which the holder can buy the underlying asset if they choose to exercise the option. For put options, it is the price at which the holder can sell the underlying asset. The strike price determines whether an option is in-the-money (ITM) or out-of-the-money (OTM).
What does strike price tell you? ›
The strike price indicates the predetermined price at which an option can be bought or sold when it's exercised. It referes to a future date. In contrast, spot price refers to the current market price of an asset.
How to choose a strike price in options? ›
Choosing the strike for a given options position depends heavily on one's outlook for the underlying security. Moreover, the strike price decision also typically involves the consideration of other factors - such as one's risk tolerance, or the prevailing trading conditions in the market.
What is the strike price for dummies? ›
The strike price, also known as the exercise price, is the predetermined price at which a specific security may be purchased (for a call option) or sold (for a put option) by the option holder until the expiration date of the options contract.
What happens if my call option hits strike price? ›
When the stock price equals the strike price, the option contract has zero intrinsic value and is at the money. Therefore, there is really no reason to exercise the contract when it can be bought in the market for the same price. The option contract is not exercised and expires worthless.
Who pays strike price? ›
It's the amount of money that the buyer of an option pays to the seller for the right but not the obligation to exercise the option. The price difference between the underlying security's market price and the strike price determines an option's value in what's known as the moneyness of the option.
What is the average strike price? ›
An average strike option is a type of option where the strike price depends on the average price of the underlying asset over a specified period of time. The payoff is the difference between the price of the underlying at expiry and the average price (strike).
Why is my strike price so high? ›
When a stock option is “out-of-the-money” (or OTM), its strike price is higher than the current FMV of the underlying stock. This means that the option has no intrinsic value, because it would be worth nothing if it were exercised today.
What to buy today call or put? ›
Simply put - if the price of the underlying stock is expected to go up in value, then you BUY CALL options. Conversely, if the price is expected to go down, then you BUY PUT options. This way, you can buy or sell the underlying stock at a fixed price even if its price goes up or down using a stock trading app.
The holder — or buyer — of the option profits when the stock price declines below the strike price before the expiration date. The writer — or seller — of the put makes money from the premium the buyer pays to purchase the option.
Can a strike price change? ›
While your strike price always stays the same, the fair market value (FMV) of your company's shares typically changes over time. You profit from this form of equity when you're able to sell your exercised shares for more than the strike price.
Can you sell options before strike price? ›
The call owner can exercise the option, putting up cash to buy the stock at the strike price. Or the owner can simply sell the option at its fair market value to another buyer before it expires.
What is strike price with an example? ›
Strike Price Examples or Examples of Strike Price
Suppose a stock with an underlying price of INR 210 is bought under a call option contract by a trader at a strike price of INR 175. Here, the seller is anticipating that the stock price will drop.
What is an example of at the money strike price? ›
An At-the-money call option is described as a call option whose strike price is approximately equal to spot price of the underlying assets (i.e. Strike price=Spot price). Hence, NIFTY FEB 8300 CALL would be an example of At-the-money call option, where the spot price is Rs 8300.
What is the difference between a call price and a strike price? ›
A call option is a contract that gives the owner the option, but not the requirement, to buy a specific underlying stock at a predetermined price (known as the “strike price”) within a certain time period (or “expiration”). For this option to buy the stock, the call buyer pays a “premium” per share to the call seller.
What does a high strike price mean? ›
The choice between a high or low strike price in options trading depends on the trader's outlook and strategy. A high strike price is typically associated with "out of the money" options, where the current market price of the underlying asset is significantly lower than the strike price.
