What is a Stock Option?
A stock option, sometimes referred to as a share option, is a contract between a buyer and a seller which gives the buyer the right to buy or sell a stock at an agreed price on or before a specific date, and the seller the obligation to complete the transaction by selling or buying the stock.
The stock option lasts from a period of time (the life of the option) and will expire after that date and have no value.
A stock option only exists because the underlying stock exists. A stock option therefore derives from the underlying stock and is a form of derivative.
There are two types of stock option.
- Call option – Option to buy at an agreed price on or before a specific date.
- Put option – Option to sell at an agreed price on or before a specific date.
An employee stock option is a type of call option granted by a business to an employee giving them the right to buy stock in the business at an agreed price on or before a specific date. The price is usually lower than the market price and is treated as part of the compensation of the employee.
For further information see the Wikipedia stock option definition.
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