What are Stock Options with Examples?

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Purchasing an option to purchase or sell stock at a predetermined price and timeframe is a legally binding agreement between two parties. An option writer is an individual who sells stock options to investors. When an investor purchases a stock option, they also pay a premium to the option’s seller.

Stock options from an employer often have complex structures and numerous fine points. In a nutshell, stock options allow you to purchase shares of the company at a predetermined price, which is usually cheaper than the share price at the time of purchase. This article will explain what employer stock options are, how they function, and how to estimate the value of employer stock options.

Stock Options

An option gives the holder the right, but not the duty, to purchase or sell stock at a predetermined price and on a specified date. Puts and calls are the two main types of options. An investor who thinks the price of a stock will go down purchases a put option, whereas an investor who thinks the price of a stock will go up purchases a call option.

Options based on stocks or an index of stocks are a type of equity derivative also known as equity options. A form of equity remuneration, employee stock options (ESOs) are granted to select workers and executives. Similar to call options in every significant way.


Option contracts are derivatives, deriving value from an underlying security like company stocks. Legally binding, options set a price and transaction date, becoming profitable when stock reaches the agreed strike price. Their value hinges on the strike price’s difference from the current stock price. The most common option types are call and put options. Calls permit asset purchase at a fixed price and time-frame, while puts allow asset sale similarly.

Examples of Stock Options

Stock options aid retention and recruitment. Prospective workers get shares below market price. Stock option holders stay via “vesting.” Vesting ensures employees stay for full options. It’s an incentive for job longevity. Until you’ve met the requirements of the vesting schedule, you don’t actually own your options.

Take the case of 10,000 shares distributed over four years at a rate of 2,500 per year as an illustration. You’ll need to stick around for at least a year to cash in on the first 2,500 options and another three years to cash in on the remaining 10,000 options. To get your full grant, you must typically remain employed with the company throughout the vesting term.

Stock Options

Mr. A purchases November $108 call options for AAPL. The price for one option contract representing 100 shares is $223. The price of a share of AAPL stock when it was acquired was $109.10. Mr. A would be able to purchase 100 shares of AAPL the next day at $108 apiece if he exercised his option.

The following morning, shares began trading at $109.20, up $2. Mr. A would earn ($109.20 – $108)*100 – $223 = -$103 if he sold the shares at the current market price. (Commissions and transaction costs, which may vary from broker to broker, are not included in this estimate.)

Case Study Stock Options

Here’s a trader’s example: predicting Nvidia Corp. (NVDA) stock rise, they invest in ten $16.10 January $170 call options, spending $16,100. Profit requires stock exceeding $186.10 (strike + call price).

Options expire valueless if stock stays below $170, losing the premium. Alternatively, if expecting Nvidia’s price drop, they buy ten January $120 puts at $11.70 each, costing $11,700. Profit comes when share price drops below $108.30. Options lose value if stock ends above $120, expiring without worth.

Options on Several Stocks

There are two types of stock options. To begin, the purchaser of a stock call option acquires the right but not the duty to purchase the underlying stock. A call option’s value increases as the underlying stock’s price rises.

Second, the buyer of a stock put option has the ability to “short” shares of stock. The value of a put option rises as the stock price falls. Financial advisors can employ “covered call” and “put” trading methods by purchasing one or both of these options.

Characteristics of Stock Options

Options are a sort of derivatives contract in which the seller and the buyer agree to provide the buyer the right, but not the obligation, to purchase or sell a given asset at a certain price and within a specified time frame. Okay, let’s go down exactly what stock options are and how they function.


European and American styles are both available. You can exercise an American option anytime before it expires. In contrast, European options have a fixed expiration and can only exercised on that day.

Expiration Date

With options, investors can wager not only on the direction of a stock’s price movement, but also on the date by which they expect it to change. The term for this is “valid through” date. Traders use the expiration date to assess the value of both the put and the call. This is known as the time value, a factor employed by various models to calculate option value.

Target Cost

The option’s usefulness is determined by the strike price. The strike price is the amount an investor expects the stock price to be above or below by the time the option expires.

A trader might purchase a call option for International Business Machines Corp. (IBM) for a specific month and strike price if they anticipate that IBM’s stock price will rise in the near future. The trader is anticipating that IBM stock would rise to over $150 by mid-January, as an illustration. As a result, they may decide to invest in a January $150 call.

Contract Term

Each contract represents a potential purchase of a predetermined number of shares. One contract is equivalent to one hundred shares of the underlying stock. Trader B buys five call options, continuing the previous scenario. The investor now has five January $150 call options.

In the event that IBM’s stock price rises over $150 before the option’s expiration, the trader will have the opportunity to exercise the option and purchase 500 shares of IBM stock at the strike price of $150. When the options expire, the trader will lose the entire premium (the amount paid to purchase the options) if the stock’s value is less than $150.


The premium is the amount that must be paid in order to acquire an option. One calculates this by first multiplying the call’s price by the total number of contracts purchased, and then dividing that result by 100. If a trader were to invest in five contracts of IBM $150 Calls in January at $1 each contract, the total cost would be $500. Traders that anticipate a decline in stock price will purchase puts.

Benefits of Stock Options

Options are a complex financial instrument, and many investors have shunned them for this same reason. As a result of inexperienced first-time option traders and their brokers, many people have had disastrous initial forays into the options market. Options trading has many advantages over trading in the futures market or with hard currency. Some of the advantages are listed below.

Worth the Cost

The ability to profit from options is substantial. Options allow a trader or investor to take a position similar to that in a stock but with significantly lower margin requirements.

If a share of stock costs Rs.1, and an investor wants to acquire 200 of them, he or she will have to pay Rs.16,000. However, if he invested the same amount of money in call options, the premium would be roughly Rs 4000. That way, we can see how various choices stack up against one another financially.

High Profit Potential

You may make a lot more money trading options instead of buying shares with cash. If the appropriate strike is picked, then the option is equivalent to buying the stock outright in terms of profit. The percentage return would be significantly larger if we could obtain options with lower margins while still making the same amount of money.

Reduce Risk

Options need registered, well-stocked, widely owned, frequently traded, and highly valued stocks for issuance.

Select from Expanded Options

The options market provides a wider variety of alternatives for trading. Trading strategies can be put together with the help of call and put options with varying expiration dates and strike prices. Calls and puts are the simplest options trading methods, but there are many more complex ones, such as butterflies and strangles.

Drawbacks to Stock Options

The financial media and certain notable market personalities have incorrectly labelled options as hazardous and deadly. However, before reaching a conclusion about the worth of options, a private investor should be aware of both sides of the argument. As we’ve seen, trading options has the potential to yield high returns; but, it’s not without its drawbacks. The primary issues with the available choices are as follows:

Lower Flow of Money

A lack of liquidity in certain stock options markets makes it more difficult for investors to enter and exit positions quickly. When market liquidity is low, it is difficult to purchase, sell, and trade assets.

Earnings from the Top

Option trading is more costly than futures or stock trading. However, investors might find bargain brokers who offer lesser commissions on trades. However, most full-service brokers charge more for options trading.

Fall of Time

Time decay is a negative factor in trading options. You lose a set proportion of your option premium every day, regardless of what happens to the underlying. The “time decay” of an options contract refers to the rate at which the contract’s value decreases over time.


Understand the value of your stock options and how they might fit into a diversified portfolio, just like you would with any other kind of employee equity pay. Because of the potential for loss associated with stock options, we typically recommend that customers consult closely with their financial advisor before making decisions about stock options.

Options have both merits and cons, and can be bought and sold. Time is of the essence in options trading because time decay is an enemy of the option buyer. The cost of trading is an additional factor to consider when deciding whether or not to engage in options trading. If you’re not well-versed in options trading, proceed with caution. To expand your perspectives on shorting a stock subject, read more.

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