Understanding Stock Options
Options are a type of financial instrument known as a derivative. This means their worth is based on, or derived from, the value of an underlying security or asset. In the case of stock options, that asset is shares of a company’s stock. The option is a contract that creates an agreement between two parties to have the option to sell or buy the stock at some point in the future at a specified price. The price is known as the strike price or exercise price.
Stock options come in two basic forms:
- Call options afford the holder the right, but not the obligation, to buy the asset at a stated price within a specific timeframe.
- Put options afford the holder the right, but not the obligation, to sell the asset at a stated price within a specific timeframe.