The strike price (also called the exercise price) is the fixed price at which the holder of a derivative security is entitled to acquire or dispose of the underlying equity security, as specified in the terms of the instrument. The strike price is set at grant and remains defined by the governing agreement, subject to any permitted adjustments.
In U.S. securities regulation, the strike price is a structural term used to describe the mechanics of derivative securities rather than their economic outcome.
Regulatory Context
Strike prices most commonly arise in connection with derivative securities such as stock options, warrants, and similar rights. For insider reporting under Section 16 of the Securities Exchange Act of 1934, these instruments are classified as derivative securities under Exchange Act Rule 16a-1(c).
The strike price is one of the required descriptive elements disclosed for derivative securities on insider reporting forms. Its inclusion reflects how the derivative instrument is structured, not whether or when the holder will exercise the right.
Role in Derivative Instruments
The strike price defines the contractual terms under which a derivative security may be exercised or settled. It operates independently of market price movements and does not, by itself, establish ownership of the underlying equity security.
Until exercise or settlement occurs, the holder of a derivative security with a stated strike price does not own the underlying shares and does not possess shareholder rights with respect to those shares.
Reporting Treatment
For Section 16 insiders, derivative securities with a strike price are disclosed on Form 3, Form 4, or Form 5, as applicable. The strike price is reported in the derivative securities table alongside other descriptive terms of the instrument, such as the number of underlying shares and the expiration date.
When a derivative security is exercised, the strike price is reported as part of the transaction details describing the conversion of the derivative position into ownership of the underlying equity security.
Scope and Boundaries
The strike price is a contractual parameter, not an assessment of value, likelihood of exercise, or expected outcome. Its disclosure serves to describe the structure of a derivative security for regulatory purposes and does not imply economic significance or interpretive meaning.
Sources
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17 CFR § 240.16a-1(c) — Definition of derivative securities for Section 16 reporting
https://www.law.cornell.edu/cfr/text/17/240.16a-1 -
17 CFR § 240.16a-4 — Treatment of derivative securities in insider reporting
https://www.law.cornell.edu/cfr/text/17/240.16a-4 -
SEC Form 4 Data Instructions — Disclosure of derivative security terms
https://www.sec.gov/files/form4data.pdf