Stock Options

Stock Option, an option or right to buy or sell stock at a specified price, usually within a specified period of time. The buyer of a stock option can choose to take action on the option—that is, to exercise it—within the specified period of time or to not take action and let the option expire.

Sometimes the term stock option refers specifically to options that a company grants its employees as compensation in addition to their salaries.

For example, a company may give an employee stock options that allow the employee to buy 100 shares of company stock at the present-day price of $40 per share at any time within the next ten years.

If the stock should rise to $50 per share, the employee can choose to exercise the option—that is, put it into effect. The employee can then buy 100 shares of company stock at $40 per share for $4000. The employee can either hold onto the stock or sell it at $50 per share for $5000, for a profit of $1000.

If the stock price should fall, the employee is not obligated to buy the stock at $40 per share. Stock options are becoming a common way for companies to reward their employees.