Stock Options Basics

Stock options basics. The principles of trading stock options.

There are 2 meanings of stock options.

#1. What companies often grant to employees instead of direct compensation for services, bonuses, etc. Giving stock options to employees is seen as a way of providing a reason to stay with the current employer and stop looking for another opportunity. Financial gains can be realized by the recipient's ability to time the receipt of income, and in some cases shift the nature of income from ordinary (wages, salary, etc.) to capital gains income.

#2. Trading in Options in the Stock markets.

We shall take a look here at a few of the basics of the stock market where you can invest your money to make a profit.

Call Option Definition

Buying a Call option gives you the right (but not the obligation) to purchase stocks of a company at a certain price (called the strike price) from the date of purchase until the third Friday of a specific month (called the expiration date).

People buy Calls because they hope the stock price will go up and they will make a profit, either by selling the Calls at a higher price, or by exercising their option (i.e., buy the shares at the strike price at a point when the market price is higher).

Put Option Definition

Buying a Put option gives you the right (but not the obligation) to sell 100 stock of a company at a certain price (called the strike price) from the date of purchase until the third Friday of a specific month (called the expiration date).

People buy Puts, because they hope the stock will go down and they will make a profit, either by selling the Puts at a higher price, or by exercising their option (i.e., forcing the seller of the Put to buy the stock at the strike price at a time when the price is lower).

Call options are a way of leveraging your money. You are able to participate in any upward moves of a stock without having to put up all the money to buy it. However, if the stock does not go up, the option buyer may lose 100% of the investment. For this reason, options are considered to be risky investments.

On the other hand, options can be used to considerably reduce risks. Most of the time, this involves selling rather than buying options. Since most markets go up over time, and most people invest in stock because they hope prices will rise, there is more interest and activity in call options than there is in put options.

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