Stock option investing is the activity of investing money in stock options. Stock option involves buying and selling of stocks at a standard price and within a predetermined stipulated time. Those who buy stock options are called holders and the sellers of stock options are known as writers. Call is the name given to an options contract, which empowers the investor with the right to buy a determined amount of an underlying security at an assigned price within a fixed time. The option contract endows the owner with the right to sell a delineated amount of underlying asset at a specified price within a fixed time. However, in both the cases of call and put, the investor in stock options is not bound by an obligation.
In stock option investing, there is a stock option’s contract. Five factors decide its premium or value. They are as follows:
- The cost price of the stock
- Its strike price
- The total cost needed to hold a position in the stock
- The expiration date of the stock
- An estimate of the volatility of the stock price in the future
The strike price of the stock is the price of buying and selling price of the underlying stock. There are two positions of profit making in this mode of investing: when the price of the stock is more than the strike price and when the price is less than the strike price. Stock option investing is a flexible process and through it the business houses share the ownership with their employees. Employee Stock Options (ESO) is the name given to stock options plans. They are used by both private and public concerns. The Employee Stock Options can be divided into two parts:
- Incentive Stock Options (ISO)- These are statutory options or qualified options
- Non Qualified Stock Options (NSO)
The standardized options contracts that are listed by a host of options and futures exchanges are the most common ways of trade adopted in stock option investing.