A stock option is defined as a right to buy or sell a stock at a stated price within a specified time. Buyers of stock options are called holders and those who sell options are writers. ‘Call’ suggests an option contract giving the owner the right but not the obligation to buy a specified amount of an underlying security at a specified price within a specified time. ‘Put’ refers to an option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying asset at a set price within a specified time.
A stock option contract’s value or premium is decided by five factors: the price of the stock, the strike price, the expiration date, the cumulative cost required to hold a position in the stock (including interest plus dividends), and the estimate of the future volatility of the stock price. The price at which an underlying stock can be purchased or sold is called the strike price. A stock price must go above (for calls) or go below (for puts) the strike price, before a position can be exercised for a profit.
Stock options are a flexible way for companies to share ownership with employees, to reward employees, and attract and retain a motivated staff. Stock option plans, often referred to as Employee Stock Options (ESOs), are used both in privately and publicly held companies. ESOs may be Incentive Stock Options (ISOs) that are qualified options or statutory options, and Nonqualified Stock Options (NSOs).
To trade a stock option, the most common way used is trading standardized options contracts listed by various futures and options exchanges. The major stock exchanges in the United States include Philadelphia Stock Exchange (PHLX), American Stock Exchange (AMEX) in New York City, and Pacific Exchange (PCX) in San Francisco.
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Employee Stock Options
10 August 2010 8:30 PM |
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Employee stock options (ESOs) signify contracts between a company and its employees, which give employees the right to buy (exercise) a specific number of the company’s shares at a fixed price (the grant, strike, or exercise price) within a certain period of time (the “exercise”...
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Futures Options Trading
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A forward contract is a customized contract between two parties to buy or sell a specified quantity of a particular commodity at a specified price on a specified future date. Futures are exchange-traded forward contracts, i.e., forward contracts done in organized exchanges like stock or...
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Stock Options Trading
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Speculative activity is carried on stock exchanges through options trading. An option in the stock exchange terminology means ‘a right.’ In an option deal, therefore, the right to buy or sell a certain security within a certain time and at a certain price is purchased...
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Options Contracts
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An option contract gives you the right, but not the obligation, to buy or sell an asset at a price. You cannot buy or sell this asset either at a pre-determined time in the future or any other time till it reaches the maturity. Generally,...
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Options
10 August 2010 8:30 PM |
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A written pact between the buyer and seller is known as an option. This option in turn is associated with a listed stock, an exchange index, future contract or real estate. Options can further be categorized into the European and American style options. While the...
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Stock Option Trading
10 August 2010 8:30 PM |
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Options are an extremely attractive and economical way to enter the stock market, since the capital expenditure is minimum in comparison to a straight stock investment and also the return on investment can be a lot more. They offer higher leverage since they are cheaper...
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Options Trading
10 August 2010 8:30 PM |
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An option is a contract that gives the buyer the right (but not the obligation) to buy or sell a specified quantity of a given asset, at a specific price, on or before a specified time. Unlike futures trading, the purchaser of an option is...
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An Introduction To Stock Options
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How would you feel if you are given the opportunity to own a small portion of the multi–billion empire created by Microsoft? By any standards it will be a great opportunity. How to do it? It’s simple: buy stocks. Stock options are the shares allotted...
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Option Stock Trading
10 August 2010 8:30 PM |
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A highly successful financial product nowadays, stock options offer the investor flexibility, diversification and control to protect his/her stock portfolio or generate more investment income. Options are advantageous because they can be used under almost every market condition and for almost every investment objective. Options...
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Option Trading
10 August 2010 8:30 PM |
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An option is a contract which gives the buyer (holder) the right, but not the obligation, to buy or sell specified quantity of the underlying assets (such as a commodity, currency, or security), at a specific (strike) price on or before a specified time (expiration...