Financial Dictionary -> Investing -> Option

Stock options are a method of buying stock using a contract. The contract permits the holder the right to buy the stock at an agreed price within a certain amount of time. They are sold and traded frequently and garner their own speculation from the market, from investors predicting their value.

The stock option comes with a contract that outlines your right to buy or sell the stock at the agreed price and within the agreed amount of time and when you decided to exercise the contract the seller is legally obligated to sell the stock at the price in the contract.

If you own stock options giving you the right to purchase stock at the price stated and the stock begins to rise in value, the value of the contract goes up and you can sell it on this theory making a profit or cash it in. On the other hand the seller of the option may think the stock is likely to take a hit and therefore sells the contract or quickly buys and sells the stock before it does.

A company may issue stock options during its early operation to create hype and to entice people in to buying stock from them. Sometimes employees are often given stock options as a perk.

The sister of stock options are put options which give you the right to sell your stock in the future at an agreed price, which benefits you if the stock value takes a hit, because you can still sell the stock at a higher price. The actual stock put contracts can also be bought and sold on speculation.

Like the physical stock, trading in options is speculative and considered a gamble.