An underlying asset is the financial instrument from which a derivative's price is based.In derivatives trading, a financial instrument derives its value from an underlying asset. A derivative, such as an option on a stock, gives the holder the right to buy or sell that stock at a specified price, known as the strike price, at a certain future date, known as the expiration date. The stock is the underlying asset. The underlying asset’s value determines whether an options trader should exercise his option. Suppose Bob the options trader buys a call option at $2 on shares of ABC Corporation. Options represent 100 shares of the underlying asset, so Bob pays $200 for the option. The strike price is $50. ABC is the underlying asset. Say ABC rises to $55 per share. Bob exercises his right to buy 100 shares of ABC at $50 and then sell those shares in the market for their current price of $55. He profits $300. That’s $500 for the difference in the trade, minus the $200 he paid for the option. If ABC falls below $50 per share, Bob will not exercise his call. Underlying assets can also be futures, commodities, currency or indexes.