Stock Option Definition and Legal Meaning
On this page, you'll find the legal definition and meaning of Stock Option, written in plain English, along with examples of how it is used.
What is Stock Option?
(n) Stock option is the future right available to a buyer of future deal to purchase the commodity at the agreed price paying the consideration agreed at the time the option is granted. Stock option is available in forward trading where in the buyer can settle the deal by paying or accepting the difference of option price and market price without changing the commodity, stock etc
History and Meaning of Stock Option
A stock option is a form of derivative that is offered or granted by a company, which gives employees or investors the right to buy shares of the company’s stock at a set price, known as the strike price. Stock options were first used in the United States in the early 20th century, primarily as a way to incentivize employees and align their interests with the company's growth. In the years since then, stock options have become an important tool for companies to attract and retain top talent, while also allowing investors to speculate on a company's future prospects.
Examples of Stock Option
John is considering joining a startup as a software engineer, but he is especially interested in the company's stock options. The company has promised to grant him the right to purchase 10,000 shares of stock at $10 per share, which he believes could be worth much more in the future.
Susan works for a large pharmaceutical company that offers its employees stock options as part of their compensation package. She exercises her options by purchasing 500 shares of stock at the strike price of $50 per share, then sells them immediately for $60 per share, resulting in a profit of $5,000.
Bob is an investor who believes that a particular company is undervalued and has strong growth potential. He purchases call options, which grant him the right to purchase shares of the company's stock at a set price within a specified time frame. If the stock price increases, Bob could profit from exercising his options.
Legal Terms Similar to Stock Option
- Derivative: A financial instrument whose value is derived from an underlying asset, such as a stock or commodity.
- Call option: A type of option that grants the holder the right, but not the obligation, to buy an asset at a specified price within a specified time frame.
- Put option: A type of option that grants the holder the right, but not the obligation, to sell an asset at a specified price within a specified time frame.