What are stock options?
Stock options are agreements between two parties for a specified time period (up to the expiry date) that give holders the right, not the obligation, to buy or sell a specified number of shares, usually a lot of 100, at a pre-determined price (exercise or strike price). You can buy or sell options just like shares.
Stock options are offered to managers and employees as a way to tie their compensation to the success of the company. A stock option gives the holder the right to buy a stock from the company at a certain price (strike price) at a future date. If the stock values goes up above that price, the holder gains additional profit from the sale of the options. In the last decade the use of options has grown exponentially. In 1992, one million employees received options. Today 10 million do, though the vast majority of actual options are concentrated heavily at the top. Business Week estimates that 16.3% of all outstanding shares at large companies are in the form of 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 th
In their simplest form, stock options are a contract between two parties that expires at an agreed-upon time in the future. The contract purchaser is buying the right, but not the obligation, to buy (a “call” option) or sell (a “put” option) an asset (the “underlying”) at a specific price, on or before the agreed-upon date. The contract seller is accepting the obligation to take the other side of the transaction. The earliest known options trade dates from 7th century BCE. Thales of Miletus speculated that the year’s olive harvest would be especially bountiful, and put a deposit on every olive press in his region of Greece. The harvest was huge, demand for olive presses skyrocketed, and Thales sold his rights, or options, to the presses at substantial profit. The modern history of stock options trading begins with the 1973 establishment of the Chicago Board Options Exchange (CBOE) and the development of the Black-Scholes option pricing model. Stock options are defined by several key ch
You have a bakery and you need to have eggs supplied to you in the next 3 months. You are aware that the cold season will produce fewer eggs in 3 months. You suspect that the price of the eggs is going to increase because of the cold weather. In order to ensure that you get a certain price for the eggs, you enter into an agreement with an egg supplier to buy the eggs for a particular price before or at the 3 months. The egg supplier agrees if you give him a certain amount. You then have the ability to buy the eggs at the price you wish after the 3 months if you decide to do so. You have entered into a basic options contract. A stock option is the same type of contract where you are buying the right but not the obligation to buy a stock or share of a company at a particular price, on or before the agreed date. The owner of the stock is accepting the obligation to sell the stock at your price for a small fee. Why Trade in Stock Options? It is easy to see why someone would buy options in
