Stock Option

Stock options enable option holder to purchase or sell the underlying stock in future for a price that has been agreed upon today. Therefore, this is classified as a futures contract. Stock option is actually a right coupled with a choice. In other words, it is not compulsory for the stock options holder to exercise stock options. Based on these characteristics, stock options can be defined as a right, which gives the stock option holder a choice to purchase or sell any stocks at a time in future, for a price that has been agreed today between the buyer and seller of the stock option.



Stock options trading are hedging techniques. They reduce losses while speculating on stock markets. There are two types of stock options. These are the call options, and the put options. The call option is the right to buy the stock at the future date, while the put option is the right to sell the stock in future. In the stock markets, there are stock option chains from which the investor or trader has to select. These chains list the premium at which the stock option for specific strike rate, on specific date can be bought.



Option dates is a terminology referring to the date from which the options can be exercised to the last date or the expiration date of the stock option. Stock option valuation or stock option pricing depends upon several factors such as the price of the underlying stock, interest rates prevailing at the time, the number of days remaining before the stock option reaches its expiry date, the price at which the stock option can be exercised or the strike price, etc.



The stock option agreement contains details of employee stock option. Employees are often offered such stock option to lure them. These stock options give them right to purchase the stocks of the company for a specific consideration, on or before a specific date.



Options dates, and stock option valuation can affect the extent of benefit the employees get with the employee stock options. Employees can only offered stock options at fair market value on the date when such options are granted. If the price at which the stock is granted is considerably lower than fair market value, it is referred to as discounted stock options. Such discounting of stock is no longer allowed. This prompted some companies to come up with what is termed as stock option backdating. This is also controversial way of compensating employees, as investors are misled in process. There are taxation issues as well associated with such discounting and backdating of stock options.



For buying stock options in the stock markets, the investor or trader approaches the stockbroker, or accesses the market through online facilities. Unlike this, the employee stock option is exercised with the employer. Stock option accounting or stock option expensing refers to special method of recording the details of employee stock options. In this, stock option overhang refers to those stock options that are yet to be exercised by the employees. Stock option conversions refer to those stock options that have been converted into stocks.