exercise price

So what happens if the share price shoots past the number written on your option contract? That question is exactly why exercise price matters, and once you understand it, options stop feeling like magic and start feeling like a simple agreement between two people.

Here is the plain version. An option is a contract that gives you the right, not the obligation, to buy or sell a share at a price both sides agreed on when the contract was signed. That agreed price is the exercise price, sometimes called the strike price. It does not move once the contract exists, even if the actual market price of the share jumps around every single day.

Say a trader on the Nigerian Exchange buys a call option on a bank stock with an exercise price of ₦25 per share. It does not matter that the bank's share price is dancing between ₦22 and ₦28 that month. If the trader decides to exercise the option, they still buy at ₦25, because that is the number written into the contract from day one.

In London, someone holding an employee share option at work might have an exercise price of £4 per share, set the day they joined. Years later, if the company's shares are trading at £9, that person can still buy at £4 and pocket the difference. That gap between the exercise price and the market price is where the real money in options comes from.

A Nigerian in Manchester sending money home might never touch options directly, but understanding exercise price still helps, because it explains why some relatives back home talk about stock options from their jobs abroad as if they found free money. They did not find it. They locked in a price early and waited for the market to move in their favour.