Stock options definition

Option (finance)

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Stock Option Definition

Definition: A stock option is the right to purchase a specific number of common shares at a fixed price over a set period of time at a future date. In other words, it gives the owner of the option the ability to purchase shares at a future date for a specific price regardless of what the market price is. Tile Co. These offers must be expires in 12 months. The current market value of Tile Co. When the call option strike price is below the stock's price, it's considered in-the-money since the investor can buy the stock for a lower price than in the current market.

Put options are the exact opposite. They're considered out-of-the-money when the strike price is below the stock price since an investor wouldn't sell the stock at a lower price the strike than in the market. Put options are in-the-money when the strike price is above the stock price since investors can sell the stock at the higher strike price than the market price of the stock.

The Options Market

All stock options expire on a certain date, called the expiration date. For normal listed options, this can be up to nine months from the date the options are first listed for trading. Longer-term option contracts, called long-term equity anticipation securities LEAPS , are also available on many stocks. These can have expiration dates up to three years from the listing date. Options expire at market close on Friday, unless it falls on a market holiday, in which case expiration is moved back one business day. Monthly options expire on the third Friday of the expiration month, while weekly options expire on each of the other Fridays in a month.

Unlike shares of stock, which have a two-day settlement period, options settle the next day.

A stock option contract entitles the owner of the contract to shares of the underlying stock upon expiration. So, if you purchase seven call option contracts, you are acquiring the right to purchase shares. And, if the owner of a call option decides to exercise their right to buy the stock at a particular price, the option writer must deliver the stock at that price.

Options contracts usually represent shares of the underlying security, and the buyer will pay a premium fee for each contract. You can make money by being an option buyer or an option writer. If you are a call option buyer, you can make a profit if the underlying stock rises above the strike price before the expiration date.

If you are a put option buyer, you can make a profit if the price falls below the strike price before the expiration date. Options trading can be riskier than trading stocks. However, when it is done properly, it can be more profitable for the investor than traditional stock market investing.

Stock Options - Definition and Description

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