Understanding Stock Options

This article is about Understanding Stock Options. The Chicago Board Options Exchange (CBOE) was setup in 1973, which was the most significant development in the stock options scenario. With the development of Black-Scholes pricing model, a standard formula came into place for calculating the varying price over a time period. An employee stock option plan is different from an Employee Stock Ownership Plan (ESOP).

Understanding Stock Options

A stock option refers to the option given by the company to its employees, to buy a limited amount of the company’s shares, over a limited period of time, at a price, which is usually discounted. There are a few terms related to stock options, such as, the grant price, which is the price at which the stock is offered. The expiration date refers to the date, on which the stock can be exercised, as in the case of European stocks. In the case of American stocks, it is the date before which, the stock has to be exercised.

Underlying refers to the asset, on which the stock option stands. The exercise price or the strike price, is the price at which, the underlying asset will be traded. A ‘call option’ refers to the buying, and a ‘put option’ refers to the selling between two parties, at a certain time for a certain price. A vesting period is the time frame within which, the employee can buy the stock. There are two methods to Stock options such as, Incentive stock option and nonqualified stock option.

Stock options are only appropriate for companies with a promising future, since they make their stock attractive on the basis of future prospects. Although stock options are increasingly popular amongst companies dealing in e-commerce, small companies that do not wish to go public do not prefer it. There are three types of options.

When the exercise price is same as the underlying price, it is referred to as at-the-money-option (ATM). When the underlying price is too much from the exercise price, it is out-of-the-money-option (OTM). When profit can be easily derived from the transaction, it is called an in-the-money-option (ITM).

There are six exchanges in the US that list the standard options, and form the major ‘open market’ operations. The stock advice received can be utilized in making the appropriate investment decisions. Free stock investment advice can be obtained through various sources and investment brokers are a good option. Even though advice is given in exchange for a fee or commission, there exist many stock brokers who offer their services for free.

There are a number of websites that provide stock investment related advice. These websites offer tips, suggestions and a list of precautions that are required to be followed by an investor, while contemplating a big investment. Banks, financial institutions and governments organizations also provide assistance on important stock investment decisions.

It is often observed that even business newspapers and magazines offer free tips and suggestions on stock related issues. These tips and suggestions prove to be beneficial for both, the beginners as well as previous investors.

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