SIE Exam Question 277: Answer and Explanation

Question: 277

For a call option, the strike price is:

• A. The market value of the underlying security at which the option must be exercised
• B. The price at which the call holder can buy the underlying security from the call writer
• C. The breakeven point for the holder of the option
• D. The price at which the call writer must buy the underlying securities from the call holder

Correct Answer: B

Explanation:

B: The strike price for a call option is the price at which the call seller is obligated to sell the underlying security to the call holder if the option is exercised. When the call option hits the strike price, it is said to be in the money; however, the call holder is not obligated to buy the underlying securities when they reach the strike price. Additionally, the strike price added to the option's premium, and not simply the strike price, is the breakeven point for both the holder and writer of a call option. Finally, the strike price for a put option, and not a call option, is the price at which the call writer must buy the underlying securities from the call holder when the put is exercised.