Strike That

QWhat’s a stock option’s “strike price”? — T.F.,

Richmond, Virginia

A

The strike price is the price at which the option can be exercised.

Let’s say you work for Dodgeball Supply Co. (ticker: WHAPP) and receive 100 stock options with a strike price of $20 each. Later (and before the options expire), if Dodgeball Supply’s stock is trading at $45 per share, you may decide to “exercise” your options.

Since your options carry a strike price of $20, you’re can buy up to 100 shares at $20 each — not their going price of $45. To exercise them all, you’ll hand over $2,000 for 100 shares worth $4,500. You can hang on to them as long as you like, or quickly cash out for a $2,500 profit.

Of course, it’s a little more complicated than that. There are tax issues to consider, for one thing, and company stock options do expire. Read your stock option plan’s rules carefully, and consider seeking professional financial advice. Kaye A. Thomas’ book “Consider Your Options: Get the Most From Your Equity Compensation” (Fairmark Press, $24) may also be helpful.

*** Q

How can a stock start trading in the morning at a higher price per share than the price at the close of trading the day before? — M.G., Chicago A

The price may have risen during after-hours trading, or demand for the shares may have built up overnight — perhaps due to good news released, such as a very strong quarterly earnings report.

If buyers are willing to pay more for the shares, sellers will sell them for more. A stock’s price reflects the last price at which someone was willing to buy it and someone else was willing to sell it.

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