What's the difference between a stock option's strike price and its fair market value?

The strike price (or exercise price) is the fixed amount you pay to buy each share when you exercise your option – it's set at grant, typically at the FMV on that date. Fair market value is what a share is actually worth today: a public stock's market price, or for a private company the most recent 409A valuation. The gap between them, called the bargain element or spread, drives your taxes. If your strike is $5 and FMV is $50, exercising creates a $45-per-share spread that's ordinary income for NSOs or an AMT preference item for ISOs. Options are only worth exercising when FMV exceeds the strike (in the money); if FMV is below your strike, the options are underwater and worthless to exercise. Understanding this spread is the foundation of every equity tax decision.