What is the definition of Option in stock trading?

An option is a financial derivative that gives the holder the right, but not the obligation to buy or sell a financial asset at a pre-determined price during a pre-determined period. The issuer of an option has to comply with the wishes of the option holder, regardless of whether it is a financially good deal.

There are two kinds of options:

• Put - the option to sell
• Call - the option to buy

Options are used as a means of hedging or of relatively leveraged speculation (this is not leveraged in the usual form as there is no requirement to borrow money and the losses are limited, but the potential returns are higher than with other investments).

There are 3 key terms to know when considering options:

• Strike Price - the value at which the shares can be sold (i.e. $200), regardless of the current market value
• Exercise Date - the date by which the option has to be exercised or expires
• Contract - the contract of an option provides the buyer with exposure to 100 shares. The price of an option is always per share amount so the cost of the contract will be multiplied by 100.

How to trade stock options