What Is An Option?
Company Stock Options
Stock options are probably one of the most talked about but least understood aspect of stock market trading. Most people are familiar with stock options offered by companies as a form of incentive for employment or performance. In these types of stock options, almost always offered for the same company where one is employed, give the employee the option to buy stock in the future for a set price in the present. In this way a company might offer you the option to purchase 1,000 shares of their company´s stock well below market value in a year or so. In this way one can execute the options purchase in a year if the stock price has indeed passed its option price value. It is essentially offering the company stock at a discount in order give incentives to employees to either work with the company or contribute to making the company profitable.
Options Trading
The more complex but often lucrative sense of the work options in the stock market is in trading stock options. A stock option is an offer from a seller to a buyer, a contract, for a specific price, time period and premium payout. The premium, when speaking of stock options, is the fee paid to the seller for offering the option to buy future stocks at a specified price. In option trading, there exists the opportunity for the seller to make money or the stock options buyer to make money, and at times both. To better understand stock options trading, use this options contract example:
Seller offers Buyer 100 shares of Stock XYZ as an options contract. The contract period will be for 1 year. The premium will be $200. The value of stock XYZ is currently $78 per share. The options price is to purchase this stock at or before the end of the contract period (1 year) for the price of $80 per share.
In 9 months the value of stock XYZ is $84.00. The buyer will now calculate the value of the stock if purchased at the options price: $8,000.
The value of the stock once purchased at the current market rate 9 months into the contract will be: $8,400
The buyer would then deduct the premium price as that will cut into the potential profits. $8,400- $200 = $200 profit. A decent profit plus the acquisition of the stock.
In this quick example it is easy to see how options trading can be a benefit. While in this case the buyer will make more than the seller, or options seller, the seller still makes his premium, mitigating his losses on his stock.
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- What Is A Covered Call?
- What Is An Ask?
- What Is A Bid?
- What Is A Put?
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