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. |
