Which of the following is most likely to be known at the time an option is purchased?

• A. its strike price
• B. its premium
• C. its expiration date
• D. its strike price, the premium, and its expiration date

Answer: (D)

When you buy an option, you enter a contract with fixed terms that are set at the moment of purchase. Those terms include the strike price, the premium you pay, and the expiration date. The strike price is the price at which you can exercise the option, the premium is the price you pay to obtain the option, and the expiration date is the last day you can exercise it. All three are defined in the contract and do not change after you buy.

Because the contract specifies these three elements, knowing all of them at purchase is essential. Focusing on just one of them (the strike price alone, or the premium alone, or the expiration date alone) doesn’t capture what you’ve agreed to in the option. The underlying price of the asset at purchase can be observed, but it isn’t a fixed term of the option contract. That’s why the most complete and informative knowledge at purchase is the combination of strike price, premium, and expiration date.