The fixed price at which the underlying asset of an option contract may be bought or sold. For example, the buyer of a call will have the right to buy the underlying at the fixed price, i.e., the exercise price. At expiration, if the price of the underlying is above the exercise price, the buyer (option holder) would exercise the option (which is said to be in the money), with the gains (payoff) to the buyer being the price of its underlying minus the exercise price. On the contrary, if the price of the underlying is below the exercise price, the buyer will not exercise the option (as it is said to be out-of-the-money), and payoff would be zero.

The holder of a call option has the potential for unlimited gains if the underlying ends up above the exercise price, over the span of the option’s life including expiration date (for an American option/ American-style option) or only at expiration date (for a European option/ European-style option). Moreover, the holder of a call will lose nothing but the price (option premium) if the underlying ends up below the exercise price at expiration.

The exercise price is also called the strike price.