Short definition: Stock options are financial derivatives that give the holder the right, but not the obligation, to buy or sell a specific number of shares of a company’s stock at a predetermined price (strike price) within a specified period.
Explanation: Stock options are often used as a form of employee compensation or as an investment tool. There are two main types of stock options: call options (the right to buy) and put options (the right to sell). The value of a stock option is influenced by factors such as the underlying stock price, the strike price, the time until expiration, and the volatility of the stock.
Example: An employee might receive stock options as part of their compensation package, giving them the right to buy company stock at a discounted price in the future. If the stock price rises above the strike price, the employee can exercise their options and profit from the difference.
Additional information (optional): Stock options can be complex financial instruments and involve risks. Investors and employees should carefully consider the terms and conditions of any stock options before exercising them or making investment decisions based on them.