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Definition:
Options trading uses several related phrases that are unique to options markets. Some commonly used, but often misunderstood options phrases are :
The strike price (or exercise price) of an options contract is the price that the underlying security will be bought or sold at if the option is exercised (i.e. if the rights given by the contract are used). It is the difference between the strike price and the price of the underlying security at the time of exercise that gives the options trader their profit.
An option is exercised if the rights given to the buyer of the options contract are used. For example, if the buyer of a Call contract decides to use their right to buy the underlying security on (European style options) or at any time up to (US style options) the expiration date, they will have exercised their option. Options contracts are exercised via the exchange or options clearing system, at which time a matching options seller is chosen (by the exchange) and becomes obligated to complete the transaction.
Options contracts specify the expiration date as part of the contract specifications. For European style options, the expiration date is the date that an in the money (in profit) options contract will be exercised. For US style options, the expiration date is the last date that an in the money options contract can be exercised. Any options contracts that are out of the money (not in profit) on the expiration date will not be exercised, and will expire worthless instead. Options traders who have bought options contracts want their options to be in the money on the expiration date, and traders who have sold options contracts want their options to be out of the money and expire worthless on the expiration date.
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