Stock Options Explained

A stock option is a privilege, sold by one party to another that gives the buyer the right, but not the obligation, to buy or sell a stock at an agreed-upon price within a specified period. American options, which make up most of the public exchange-traded stock options, can be exercised any time between the date of purchase and the expiration date of the option. On the other hand, European options, also known as "share options" in the United Kingdom, are slightly less common and can only be redeemed at the expiration date.

The stock option contract is between two consenting parties, and the options usually represent 100 shares of an underlying stock. A stock option is considered a call when a buyer enters into a contract to purchase a stock at a specific price by a particular date. An option is regarded as a put when the option buyer takes out a contract to sell a stock at an agreed-on price on or before a specific date.

The strike price of an option is what dictates whether or not it's valuable. The strike price is the predetermined price at which the underlying stock can be bought or sold. Call option holders profit when the strike price is lower than current market value. Put option holders profit when the strike price is higher than the current market value.

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