A stock option is a derivative contract that gives the holder the right, but not the obligation, to buy or sell a specific amount of a company's stock at a predetermined price (the strike price) within a specified time period. Stock options are typically granted by companies to employees as part of their compensation package or traded on organized exchanges.
There are two types of stock options:
Stock options provide the opportunity for potential financial gains for the holder if the stock price moves in their favor. However, they also involve risks and may expire worthless if the stock price does not reach the strike price or the option is not exercised before the expiration date.
Additionally, stock options can also be used by investors as a speculative tool to profit from fluctuations in stock prices without actually owning the underlying stocks. Traders can buy and sell options contracts in the market, taking advantage of price movements and volatility.
Stock options have an expiration date, after which they become worthless. The expiration date can range from a few days to several years, depending on the contract. Options also have a premium, which is the price paid to acquire the option. This premium is influenced by various factors, including the current stock price, strike price, time remaining until expiration, volatility of the underlying stock, and interest rates.
It's worth noting that stock options are different from stock grants or restricted stock units (RSUs) that are commonly used as part of employee compensation. While options provide the right to buy or sell stocks in the future, RSUs grant the actual ownership of stocks after a specific vesting period.