---
title: Strike price (exercise price) — what it means and why it matters | Allocate AI
description: The fixed price at which a stock option lets you buy a share, set when the option is granted, no matter what the stock is worth later.
canonical: https://allocateai.io/glossary/strike-price
site: Allocate AI — https://allocateai.io
---

# Strike price (exercise price)

The fixed price at which a stock option lets you buy a share, set when the option is granted, no matter what the stock is worth later.

The strike price, also called the exercise price, is the locked-in amount you pay per share when you use a stock option. It is set on the grant date and never changes. The option has value only when the stock is worth more than the strike; that difference is called the spread, and options with a spread are in the money.

For public companies the strike is usually the market price on the grant date. For private companies it comes from a 409A valuation, an independent appraisal that sets the fair market value of common stock. That number is often far below the price investors paid in the last funding round, which is what makes early options attractive.

A quick example: 4,000 options at a $5 strike. If the stock later trades at $25, exercising costs $20,000 and yields shares worth $100,000, a spread of $80,000. If the stock falls to $4, the options are underwater and worth nothing for now, though they may recover before they expire.

Common mistakes: treating the number of options as if it were the number of shares you own (you still have to pay the strike), and forgetting the tax on the spread, which for NSOs is due at exercise. When comparing offers, ask for the strike, the current 409A value, the most recent preferred price, and the total shares outstanding.

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## Related terms

- [ISO (incentive stock option)](https://allocateai.io/glossary/iso) — A type of employee stock option with special tax treatment: no regular income tax when you exercise, and possible long-term capital gains if you hold.
- [NSO (non-qualified stock option)](https://allocateai.io/glossary/nso) — A stock option where the gain between your strike price and the share value is taxed as ordinary income the moment you exercise.
- [Total compensation](https://allocateai.io/glossary/total-compensation) — Everything a job pays in a year added together: base salary, bonus, stock, and sometimes benefits, as opposed to the salary figure alone.

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