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 definition.
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