An Introduction to Stock Options

An Introduction to Stock Options - An Introduction to Stock...

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An Introduction to Stock Options Stock options provide advanced investors with additional opportunities for potentially rewarding returns. But stock options do possess risks that require an in-depth understanding of how they work. This article provides a basic overview of stock options. Topics 1. An Introduction to Stock Options 2. The Basics of Stock Options 3. Components of an Option's Value 4. Employee Stock Options 5. Consider Option Strategies Carefully 1 An Introduction to Stock Options Options on stocks and stock indexes are derivative instruments. Stock investors may use stock options to hedge against a price decline, to lock in a future purchase price, or to speculate on the future price of a stock. Employees may also receive stock options through an employee compensation plan. For employees, stock options represent the potential for growth in value and the possibility that the increase in value will be taxed at a favorable capital-gains tax rate. Back to top 2 The Basics of Stock Options A stock option is essentially a contract that gives one party the right to purchase or sell a stated number of shares of a stock at a specified price. The price at which the shares may be purchased or sold is known as the strike or exercise price . The right to exercise lasts for a stated period of time, which may be months or years, until the expiration date . If not exercised on or before the expiration date, the option expires. Options come in two forms: calls and puts. A call option gives the option purchaser the right to buy the underlying stock. A put option gives the option purchaser the right to sell the underlying stock. A call option is valuable to the extent that the exercise price is below the market value of the underlying stock. For example, if a stock is trading at $100 per share and you hold a call option entitling you to buy the stock at $72 per share, your option has an immediate value to you of $100 - $72 = $28, before taking into account any tax consequences or transaction fees. A put option is the mirror image of a call option. A put option becomes more valuable as the price of the stock
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This note was uploaded on 02/22/2012 for the course MANEC 453 taught by Professor Jerrynelson during the Winter '10 term at BYU.

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An Introduction to Stock Options - An Introduction to Stock...

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