Exercise Price

From Financial Literacy Wiki

Exercise price or strike price (commonly known in US) is the agreed upon price for transacting the underlying security of warrants. This is the price at which a warrant holder may buy or sell the underlying shares or the price used in determining the cash settlement amount.

In-the-Money and Out-of-the-Money

A call warrant is said to be out-of-the-money when the exercise price is higher than the share price and in-the-money when the exercise price is lower than the share price.

A call warrant will be worthless if the share price is lower than the exercise price on the expiry day. However, with upward movements in the share price, the holder can still earn excellent returns trading the warrant prior to the expiry date.

The opposite occurs for a put warrant. It will be in-the-money when the exercise price is above the share price and out-of-the-money when the exercise price is below the share price. With downward movements in the share price, the holder can make profits trading the put warrant prior to its expiry date.