A stock option is a specific type of option that uses the stock itself as an underlying instrument to determine the option's pay-off (and therefore its value). Thus it is a contract to buy (known as a "call option") or sell (known as a "put option") a certain number of shares of stock, at a predetermined or calculable (from a formula in the contract) price.
2006-09-18 15:53:01
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answer #1
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answered by stephaniea 2
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Lets simplify this a little bit. Suppose you pay $100 dollars for an option to buy a 1000 shares of stocks at $10 dollars each. You hold the option for a month and the price of the stock goes up to say $11 dollars. You will be able to buy those 1000 shares (exercise your option) at $10,000 ($10 X 1000 shares) and you can sell the shares right away for $11,000 ($11 X 1000 shares). A nifty profit for investing $100 to make $1000. What you are bettibg on is to pay a little now and hope the stock makes a run upwards. However if the stocks stay low, and your options expire, you lose your $100 bucks.
Now, the seller of the option received a $100 from you when he sold you the option and now must sell you his stocks at lower than the market price. But if the stock stay low, he pockets your $100 bucks as profit.
The opposit is called " the put". Both of these methods are speculative and not long term investment insturments. There is a different kind of stock option used by large corporations as compensation incentives for key executives. They work this way.
Let suppose you are a key manager for a company. You want to get paid a lot becuase you know the company needs you. The company on the other hand do not want to pay the race horse until at the finish line. So the company grants the employee so many shares of "stock options", say 100,000 shares, at a specific price, say $20 dollars. Because of you hard work, the company prospers and the stock now is $40 a share. You would be able to cash in your stock option and buy from the company 100,000 shares of stocks at $20 bucks a share, sell ot at $40 and make a $200,000 profit. Or, you may choose to hold on to the stock after you get it.
New start up companies use this attract top managers otherwise may not be able to afford if the compensation is on straight salary. A lot of the Dot-com managers made millions this way.
2006-09-18 16:30:14
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answer #2
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answered by Anonymous
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The answers above are correct. I'd just like to add... when you get stock options as part of an employee benefit, it means in addition to your regular salary, you get some shares of stock. How much you pay for these shares of stock and when you are allowed to sell them depends on your company; some companies let you buy the stock for 10-20% less than the market price on certain days of the year (or even cheaper). My employer gives me a set number of shares for free just for working there, except I can't sell them at all until I have worked there for 4 years. If I quit before then, I forfeit my shares.
2006-09-18 16:37:11
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answer #3
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answered by dcgirl 7
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stock options are valuable only when the exercise price of the options is lower than the market price. otherwise, you will just let the option lapse and get the stock in market price.
stock options are derivative instruments, their value being dependent on the stock. the stock is called the underlying asset or simply underlying.
2006-09-18 19:13:39
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answer #4
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answered by statices 2
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in laymen's terms......
its buying the right to buy a certain stock at a certain time.
so you pay a portion of the value today in order to get in line and have a the stock reserved for you in 10 days (for example). at that point you either exercise your option and buy it...or you decline, and the seller is free to sell those shares to someone else.
think this might help better than a definition someone cut and pasted.
ps
ppl, if you don't know the answer don't paste a definition....the asker could do that.
2006-09-18 15:57:07
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answer #5
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answered by ladylawyer26 3
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A fast way to hand your investment capital over to the manipulators.
2006-09-18 19:25:02
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answer #6
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answered by Anonymous
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