What are Stocks and Stock options? How Stock options work?
What are stocks?
A stock is a type of tradable asset that represents ownership in a company. Basically, when you buy stocks or shares in a company, you are buying the future earnings of that company: if the company does well, you make money, but if the company does badly, you lose money.
There are usually two types of shares: common shares and preferred shares. With certain shares, it is also possible to gain voting rights in the management of the company. Stocks are usually bought and sold through exchanges or markets such as the NSE (National Stock Exchange of India) & BSE (Bombay Stock Exchange of India).
Why are you buying an option?
1. You want to protect yourself from your risk. Let’s say you own a lot of Apple stock and you’re worried about the price going down. The right choices can limit losses if this prediction comes true.
2. You want to get exposure without spending a lot of money. Buying call options can be much cheaper than buying the same stock outright, and leverage offers much greater potential.
3. You have researched the market and want to play your intuitions. Instead of choosing whether a stock will go up or down, options can benefit from predictions about how much and when a stock will move.
What’s an option grant?
Option grants are a way for your company to grant option rights. This document usually contains information about:
Types of stock options received (ISO or NSO)
● Number of shares you can buy
● Your lottery prices
● Your stock schedules
What are the options used for?
Shares generally have many uses:
● For companies, a public offering of shares can help the company raise capital.
● For individuals, buying stocks can help them see future returns on their investments.
What are the risks of the options?
This is important because the risks are high: if the underlying stock of your option doesn’t reach its strike price and you can’t convince someone to take it off your hands before it expires, you’ve lost what you paid for. This is a 100% loss which is incredibly rare if you trade a typical stock. Therefore, options trading is riskier than stock trading.
How do stock options work?
Stock options are part of the underlying stock. As such, their price is linked to the movement of the underlying stock. If the price of the stock goes up or down, the stock options will follow.
One of the differences between stocks and stock options is that stock options cover 100 shares of the underlying stock. The option premium is affected by both the buyer’s and the seller’s price. The intrinsic value is the difference between the exercise price of the option and the market price of the underlying stock.
The premium is also affected by the time the option expires and any changes in the prices of the underlying stock during the option’s holding period.
There are two other common terms you will hear when talking about stock options and they are “in the money” and “out of the money“. If the strike price is higher than the market price, the stock is called “in the money”. If the strike price is higher than the stock price, the stock is called “out of the money”.
Exercise Stock Options
When you are ready to exercise your options, you generally have several options:
1. Cash: You can find the cash to exercise your options at the exercise price.
2. Cashless Exercise: Some employers allow you to exercise your options by selling only enough to cover the cost of exercising others.
3. Cashless Exercise/Sell: Some employers allow you to exercise and sell your options immediately at the current market price, which means you are not constantly exposed to stock prices and do not have to raise money before exercise.
Understanding and using stock options is important to many financial professions such as investment banking. Some other skills that investment professionals need are:
● Understanding of debt capital markets
● Understanding of company value
● analytical skills
● Ability to read stock charts
Ending thoughts
As with all stock options employed, it is important to have a comprehensive understanding of what your stock options are worth and how they fit into your diversified portfolio. You put yourself in a somewhat speculative position with stock options, so we generally recommend that clients work closely with their financial advisors when evaluating stock options.
For buying stock options, please open an account.
Please fill out your KYC details here.
