Stock option is defined as the right, but not an obligation, to buy or sell a stock at the specified price within the specified time. Holders are those who buy the stock options and sellers of stock options are called writers.
In the typical terminology of stock option trading, the holders and writers are referred to as the buyers and sellers of stock options respectively while there is significance of the terms ‘call’ and ‘put’ in the trading. ‘Call’ refers to the situation when the stock option gives the owner a right but not the obligation to buy the options at a specified price within the fixed time while ‘put’ refers to the situation when the options owner enjoys the right but not the obligation to sell the options within the specified time at the fixed price.
The stock option plans are often referred to as the Employee Stock Options (ESO) as the stock options are one of the most flexible ways taken up by the companies to share ownership with the employees. Generally the stock option plans are used for both the private and public companies. Trading of the stock options involves the trading of standardized options contracts that are listed by the options and futures exchanges.
The value or premium of stock option contract generally depends on the five factors which are – price of the option stock, expiration date, the strike price, the accumulative cost that is required to hold a position in the stock and an estimate of the future volatility of the stock price. Typically the strike price of an option stock defines as the price at which an underlying option stock can be bought or sold. The stock price of an option stock must go above the strike price in case of calls and the stock price must go below the strike price in case of puts.
Investing in
stock options may be difficult for the individuals who are new into the ball game of the stock trading as there are a number of choices and multitude ways available in going for the investment in stock options. Investing in stock options may be risky and hence the traders need to have a professional to guide before going for any investment. There are brokers available in the market that are having sound knowledge on the market trends and can guide the traders well. While learning for the options trading, the individuals need to understand all the different types of option contracts that are available in the market.