Stock options are financial contracts that give the holder the right, but not the obligation, to buy or sell a specific amount of a company’s stock at a predetermined price and within a specified time frame. Stock options are typically issued to employees as part of their compensation packages, but they can also be traded on exchanges like other securities.
There are two main types of stock options: call options and put options. A call option gives the holder the right to buy a specific amount of a company’s stock at a predetermined price, known as the strike price. A put option, on the other hand, gives the holder the right to sell a specific amount of a company’s stock at a predetermined price.
The price of an option is influenced by several factors, including the current market price of the underlying stock, the strike price of the option, the time remaining until the option expires, and the volatility of the stock’s price. Options can be used to hedge against price movements, speculate on future stock price movements, or generate income through options trading strategies.
Trading options can be risky, as options can expire worthless if the underlying stock price does not move as expected. It’s important for investors to understand the risks involved and to carefully evaluate their options trading strategies before investing.
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