Executive Summary
What is a strike price?
The strike price (also called exercise price) is the fixed price at which you can buy a share of company stock when you exercise your stock options. It's set on the day you receive the grant—usually the stock's fair market value that day. Your potential profit is the difference between the current stock price and the strike price. If the stock trades above the strike, you're 'in the money.' If it's below, your options are 'underwater.'
The strike price is one of the first things you'll see on your stock option grant. It sounds technical, but it's simple: it's the price you'll pay to buy each share when you exercise.
The bottom line: Your strike price is locked in at grant. It doesn't change. When you exercise, you pay that price per share—no matter what the stock is worth today. If the stock is worth more, you make money. If it's worth less, exercising doesn't make sense. See our first-time stock options guide for the full picture.
In Plain English
You get 1,000 stock options with a $10 strike price. That means: when you exercise, you pay $10 per share. You pay $10,000 total to get 1,000 shares.
If the stock is worth $50 when you exercise, those shares are worth $50,000. You paid $10,000. Your profit (before taxes) is $40,000.
If the stock is worth $5 when you exercise, those shares are worth $5,000. You'd pay $10,000 to get $5,000 worth of stock. That's a bad deal. You wouldn't exercise.
Why It's Called "Strike"
"Strike" comes from the idea that you're "striking" a deal at that price. You and the company agreed: when you exercise, you buy at this fixed price. It's like a reservation price—it's set and doesn't move.
How the Strike Price Is Set
For private companies, the strike is usually set at the "fair market value" (FMV) on the grant date. That's typically determined by a 409A valuation—an independent appraisal. The IRS has rules: the strike can't be lower than FMV (with some exceptions for ISOs).
For public companies, the strike is usually the closing stock price on the grant date. Simple.
In the Money vs. Underwater
| Term | Meaning |
|---|---|
| In the money | Stock price > strike price. Exercising makes sense (you'd profit). |
| At the money | Stock price = strike price. No profit, but no loss to exercise. |
| Underwater | Stock price < strike price. Exercising loses money. Options are worthless unless the stock recovers. |
Does the Strike Price Ever Change?
Almost never. It's fixed at grant. The only exception: stock splits. If the company does a 2-for-1 split, your strike might be halved and your share count doubled. The total value stays the same.
Frequently Asked Questions
Is a lower strike price better?
Yes. A lower strike means you pay less to buy each share. So for the same stock price, you make more profit. But the strike is usually set at FMV—you don't get to pick it. Companies can't grant options below FMV (for tax reasons).
What if my company's stock is underwater?
Your options have no value to exercise right now. You can wait and see if the stock recovers. Or, if you leave, you might let them expire. Some companies do "repricing" or "exchange" programs—they replace underwater options with new ones at a lower strike. That's not guaranteed.
Is strike price the same as exercise price?
Yes. They're the same thing. Different names, same meaning.
Disclaimer: This guide is for educational purposes. It does not constitute tax or financial advice.
Last Updated: March 2026 | Research Team: VestingStrategy