Ask the Fool

Strike That

Q: What’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.

The Motley Fool Take

Profits Brewing?

Anheuser-Busch InBev (NYSE: BUD) has had a challenging year, as the global pandemic closed bars and restaurants, exacerbating the change in consumer preferences for alcoholic beverages toward hard seltzers. Yet it would be foolish for investors to write off the world’s largest brewer with hundreds of brands to its name.

The company had been working on reducing its massive debt load (largely from its 2016 acquisition of SABMiller) before the pandemic struck, but the COVID-19 outbreak forced it to add more debt and suspend its dividend to preserve cash. It has been diligently paying down its debt, though. And it’s pursuing the hard seltzer trend with various brands in its portfolio, such as Bon & Viv.

AB InBev’s beer business has struggled, but it has followed the premiumization trend in alcoholic beverages. As one example, its Michelob Ultra accelerated its gains and remains the second-highest selling beer (in dollars) in the U.S. after Bud Light. CEO Carlos Brito believes this year’s beer sales will “improve meaningfully” compared to last year’s figures; ditto for earnings.

The big brewer may be down at the moment, but it has a huge international presence and cost advantages from its great scale. The global economy is likely to pick up in the coming year or two as parts of the world put the pandemic behind them, and AB InBev’s future looks promising. (The Motley Fool has recommended Anheuser-Busch InBev NV.)