Stock options

A stock option, also known as an equity option, is an option (right) to buy or sell a certain amount of shares in a company at a pre-determined price on a pre-determined date or dates.

• If you own a call stock option, you have the right to buy shares.
• If you own a put stock option, you have the right to sell shares.

It is up to you if you want to actually use your stock option. An option only gives you a right, not any obligation.

Today, most stock options are cash-settled stock options. That means that you don´t actually have any right to buy / sell shares, as these options are only used for speculation and are cash-settled.

Good to know

• The stock option is a type of financial instrument. It is a derivative, where the underlying asset is shares in a corporation. The stock option is thus a type of equity derivative.
• One stock option contract will normally be for 100 shares of the underlying stock.

What is the premium?

The premium is the price you pay when you purchase an option.

What is the strike price?

Remember how the stock option gives you a right, but not any obligation, to sell (put option) or buy (call option) a number of shares at a pre-determined price? That pre-determined price is called the strike price.

What is the exercise price?

A synonym for strike price.

When can I exercise my option?

So, you own a stock option. Does that mean that you can decide to use it on any date? Well, that depends on the options contract. Exactly when you can use your option to buy or sell shares (or rather, have the option cash-settled) will be specified in the options contract.

Some options can only a be exercised (used to buy or sell the shares) on a specific date, while others have several pre-determined dates, or can be exercised on any day after a specific date.

Important:

• You can only exercise a stock option once.
• You can not exercise a stock option that has expired. (The date for this is stated in the options contract.)

The two most common types of stock options are American-style stock options and European-style stock options.

• An American-style stock option can be exercised on any day until it has expired.
• A European-style stock option can only be exercised on the expiration date.
• Stock options that are neither American-style nor European-style are known as Exotics.

Exchange-traded stock options

Many well-known exchanges around the world lists stock options. It is for instance possible to buy and sell stock options at the Chicago Board Options Exchange (CBOE) and the International Securities Exchange (ISE).

What are employee stock options?

A company can elect to issue employee stock options (ESOs) to their employees. They are call options that give the employee a right, but not any obligation, to purchase shares in the company during a certain period of time.

If an employee decides to exercise their ESO, the company must issue new shares to fulfil their obligation. This makes the ESO very different from other stock options. The new shares issued will increase the overall number of outstanding shares for the company, and this dilutive effect can impact the share price.

ESOs usually have vesting schedules that make the holder´s unable to exercise the option before a certain time.

ESOs are not listed for trading on exchanges.