Stock options

What is ‘stock options’? It is a specific type of option with a stock. It is a contract to buy or sell a certain number of shares of stock at a predetermined or calculable price. The act of buying is known as the ‘call option’ and selling is referred to as the ‘put option’.

The value of a stock option contract is determined by 5 principal factors. They are:

• The price of the stock. Since every buying and selling decision is based on the market value of the stock and the performance of the company, this is naturally an important factor
• The strike price. This is the exercise price at which the owner of a call option can purchase the underlying stock or the owner of a put option can sell it. The strike price is set by the exchange.
• The cumulative cost required to hold a position in the stock.
• The time to expiration.
• An estimate of the future volatility of the stock price in the market. That is, how the market is expected to perform in the immediate days and months ahead. Political and economic condition also is a deciding factor in this.

Call Option: An option contract that gives the holder of the option the right but not the obligation to purchase a specified number of shares of the underlying stock at the given strike price on or before the expiration date of the contract. Call options on securities are normally issued for a period of less than 1 year.

Put Option: This is an option contract that gives the holder the right to sell and places upon the writer the obligation to purchase, a specified number of shares of the underlying stock at the given strike price on or before the expiration date of the contract. In simpler words, it gives investors the right to sell fixed number of shares at a fixed price within a given time frame.