We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What Are Stock Options?

By Damir Wallener
Updated May 16, 2024
Our promise to you
SmartCapitalMind is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At SmartCapitalMind, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject-matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

In their simplest form, stock options are a contract between two parties that expires at an agreed-upon time in the future. The contract purchaser is buying the right, but not the obligation, to buy (a "call" option) or sell (a "put" option) an asset (the "underlying") at a specific price, on or before the agreed-upon date. The contract seller is accepting the obligation to take the other side of the transaction.

The earliest known options trade dates from 7th century BCE. Thales of Miletus speculated that the year's olive harvest would be especially bountiful, and put a deposit on every olive press in his region of Greece. The harvest was huge, demand for olive presses skyrocketed, and Thales sold his rights, or options, to the presses at substantial profit. The modern history of options trading begins with the 1973 establishment of the Chicago Board Options Exchange (CBOE) and the development of the Black-Scholes option pricing model.

Stock options are defined by several key characteristics. The expiration date specifies when the option contract becomes null and void. The underlying is the asset upon which the stock option is based. The strike price, or exercise price, is the price at which the underlying asset will be bought or sold should the option holder decide to exercise their right to buy or sell. European-style options are only exercisable on the expiration date; American-style options are exercisable at any time before the expiration date.

An ATM, or at-the-money option, is one where the strike price is roughly the same as the current underlying price. An OTM, or out-of-the-money option, is one where the underlying price is far enough away from the strike price that there is no incentive for the holder to exercise the contract. Conversely, an ITM, or in-the-money option, is one where the holder can exercise the option profitably.

The simplest stock options trading strategy is to buy an OTM call (or put) option if the expectation is for a dramatic increase (or decrease) in the price of the underlying. Spreads involve buying one option and selling another; they are often used to lower the initial cost of the position at the expense of lower maximum potential profit. Examples of spreads are verticals, backspreads, bull and bear spreads, ratio spreads, butterflies, and condors.

Stock options allow speculators to make bets on market movement without having to pick an up or down direction. For example, buying both an ATM put and an ATM call would give the holder exposure to a dramatic move in either direction. Because of this, options traders are often said to be trading volatility rather than price.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Link to Sources
Discussion Comments
By John57 — On Jun 27, 2011

There are qualified and there are nonqualified stock options. It all depends on how your company has the plan set up. It is very important to know any tax consequences when dealing with stock options.

If any income is received, there will always be some kind of taxation on that income. There may be other fees or penalties depending on what your situation is.

By andee — On Jun 26, 2011

If your company stock option is in a qualified plan, you will need to know the tax implications if you sell your option. As long as you roll it over in to another qualified plan, you should be OK. If you choose to cash it in, you will have to pay penalties and taxes on that income.

Stock options taxation can be confusing for some to understand, so just make sure you do your research and talk with a financial investment representative so you understand all of your options.

By golf07 — On Jun 23, 2011

When I worked for a bank, part of our 401K plan was an employer stock option. Upon leaving was when I needed to decide what to do with that option. This was several years ago, and the company stock was trading at a pretty good price, so I went ahead and sold the option.

Looking at the price of that stock now, I made the right decision. This was about 10 years ago and I sold it for around $60 a share. The price of the stock today is around $11 a share.

By watson42 — On Feb 21, 2011

Employees' stock options have become a cause for drama in a lot of big businesses in recent years. I suppose it makes sense, though, because if they aren't kept as pretty much fair game for people, it can get messy.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.