A stock option is a contract that gives the buyer the right, but not the obligation, to buy or sell a specific number of shares of a company's stock at a predetermined price by a certain date. Think of it like a permission slip, where you have the choice to exercise the option (buy or sell) or let it expire unused.
Two types: There are two main types of stock options -
Call option:
Gives you the right to buy the stock at the strike price. If the stock price goes up, your option becomes more valuable.
Put option:
Gives you the right to sell the stock at the strike price. If the stock price goes down, your option becomes more valuable.
Why use stock options?
Leverage: Options can magnify your potential gains with a smaller investment compared to buying the stock outright.
Hedging: They can be used to protect your existing stock holdings from price declines.
Speculation: Options allow you to make bets on the direction of a stock's price without directly owning the shares.
Stock options are complex financial instruments, and it's crucial to understand the risks involved before trading them. Consulting with a financial advisor is always recommended before making any investment decisions.
