Underlying Security Definition
Underlying Security means the stock, commodity, or other financial instrument on which a derivative is based. The price of the underlying is the most significant factor in determining the price of the derivative. Derivatives can be call or put options, convertible securities, warrants, or stock rights. In case of options, the owner of the derivative has the right to buy or sell the underlying security at a predetermined price before expiration. The underlying security must be delivered once the option is exercised.