What Are Stock Options?

What are stock options? Stock options are the right to buy stock before a specified date, the date the option expires, at the price that is set when the option is granted. If the shares of stock are wanted by the option holder at some point during the contract, the option is exercised when the price agreed upon is paid and the shares are transferred. Basically, a stock option is an agreement in the form of a legally binding contract that gives the option holder the right to exercise the option and obtain the shares of stock for the price both parties have agreed on, but there is no obligation to purchase the stock. In exchange for this option, the option buyer will pay a premium amount, which is not returned regardless of whether the option is exercised. There is more than one type of stock option, and these contracts may sometimes become complex.

Stock options can be used for several reasons. The option can be exercised so that the underlying security can be purchased or sold, the option can be traded, or the option can be used to hedge against any losses. Stock options are sometimes given to employees of a company, as a benefit of employment, to ensure that employees can purchase stock in the company if they so choose. There are two main option types that can be purchased and sold. These are a call option and a put option. A call option gives the option holder the right to buy 100 shares of a stock at a specified price, which is called the strike price, at any time between when the option is written until the third Friday of the month specified in the option, which is the expiration month. A put option gives the option holder the right to sell 100 shares of a specific company stock at the strike price at any time between when the option is written, until the third Friday of the expiration month. Both of these options give the right to buy or sell, but there are not any obligations for the option holder to do so.

Exercising stock options can be done at any time up until the expiration date of the option contract. This means that the stock is purchased or sold at the price that was fixed at the time the option was written, even if the shares of stock have gone up or down in price since that time, no matter what the current share price. Whether the holder of an option exercises that option or not, the premium paid belongs to the option writer as consideration.

Option contracts can be simple or complex, but each contract should include some basics at the very least. This includes whether the option is a put or a call option, the class and the quantity of the stock included in the option, the strike or exercise price of the option contract, the date the option expires, which is also known as the expiration date, and the terms for settlement, which include whether physical delivery or cash settlement will be done, and the premium amount for the option contract. Stock option contracts can include many other clauses and items as well, and some can become very complicated. The answer to what are stock options is that they are contracts that will allow a trader to pay a premium in exchange for the right, but not the obligation, to buy or sell stock shares at the agreed upon strike price until the option expires, regardless of the current market value of the stock. This allows traders to benefit from price fluctuations while locking in the price paid or received for the stock shares. Many stock options expire without being exercised.

The information supplied in this article is not to be considered as medical advice and is for educational purposes only.