Stock options are contracts that give the holder the right, but not the obligation, to buy or sell a specific number of shares of a company’s stock at a predetermined price within a specified time period. There are two types of stock options: call options and put options.
A call option gives the holder the right to buy a specified number of shares of stock at a predetermined price, known as the strike price, within a specified time period. If the stock price rises above the strike price, the holder can exercise their option and buy the stock at the lower strike price, and then sell it on the open market for a profit.
A put option gives the holder the right to sell a specified number of shares of stock at a predetermined price, known as the strike price, within a specified time period. If the stock price falls below the strike price, the holder can exercise their option and sell the stock at the higher strike price, and then buy it back on the open market at a lower price for a profit.
Stock options can be used by individuals and companies as a way to hedge against potential stock price movements, as well as to speculate on the future direction of stock prices. They are often used as a form of compensation for employees of companies, allowing them to share in the potential growth of the company without having to buy shares outright.