What are Stock Options?

What is a Stock Option?

A Stock Option is an express agreement between two entities, which describes the rights and regulations with regard to stock shares and investments. Stock Options illustrate the permissible investment and trading behavior that is allowed during the duration of the Stock Option in question. Within that time, each of the two entities are entitled the option(s) to act in accordance with the stipulations set forth within the Stock Option.

Who is Involved in a Stock Option?

The following describes the two entities involved in a Stock Option agreement:

The contract purchaser is classified as an individual or entity who reserves the right to mandate permissible investment behavior and action with regard to the stock purchased. The contract purchaser must adhere to all rules and regulations expressed within the parameters of the Stock Option.

The contract seller is identified as the individual or entity who is assuming the responsibility of the investment actions of the contract purchaser.

How Does a Stock Option Work?

A Stock Option functions in accordance with the stipulations set forth in it. These rules are with regard to investment behavior, actions, and options:

Call: A ‘call’ – or desire to buy additional shares – can be a right reserved by the contract purchaser.

Put: A ‘put’ – or desire to sell any or all shares – can be a right reserved by the contract purchaser.

Underlying: The stock share expressed in the Stock Option agreement.

Upon the ending of the term of a Stock Option, the contract purchaser reserves the right to engage in the aforementioned investment activity. Subsequent to the ending of the terms of a Stock Option, the contract seller assumes all responsibility for the investment activity that has taken place.