The exercise price is used for underlying security that can be purchased/sold when trading a call/put option, respectively. It is also referred to as “strike price” and is known when an investor initiates the trade.
An option gets its value from the difference between the fixed exercise price and the market price of the underlying security.
"Exercise Price" is a term used in derivatives trading. A derivative is a financial instrument based on an underlying asset. Options are derivatives, while the stock refers to underlying securities.
There are calls and puts in options trading, and the exercise price can be in the money (ITM) or out of the money (OTM). A call option will be ITM if the exercise price is below the underlying security's price and OTM if the exercise price is above the underlying security's price. The converse would hold for a put option.
Calls vs Puts
A put gives investors the right to sell a stock in the future, but not the obligation. Investors buy puts if they think the stock is going down or own the stock and want to hedge against a price decline. They buy puts because it allows them to sell the stock at the option's strike price, even if the stock falls dramatically.
A call gives investors the right, but not the obligation, to buy stock in the future. Investors buy calls if they think the stock is going up in the future or sell the stock short and want to hedge against a surge in price. Calls give them the right to buy at the strike price even if the stock price rallies aggressively.
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