Stock options are financial instruments that give the holder the right, but not the obligation, to buy or sell a stock at a set price (known as the strike price) on or before a specific date. These options are typically used as compensation in the corporate world or as investment tools by traders and investors. There are two types of stock options:
- Call options give the holder the right to buy a stock at the strike price within a specific period.
- Put options: These give the holder the right to sell a stock at the strike price within a specific period.
The value of a stock option is derived from the underlying asset, which is the stock itself. They are often used for hedging risk, speculating on future price movements, or taking advantage of leverage (where a small initial investment can potentially lead to significant returns).