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What is a Stock Option?

Updated: Aug 20, 2021

What is a stock option contract?

The buyer has the option, but the seller has the obligation

An option is an agreement between the buyer and the seller that gives the buyer the option and the seller the obligation when the contract is exercised to buy or sell the 100 shares of stock at the strike price. Each contract is for 100 shares and the price paid for the contract is the premium paid for the contract and is not the same as owning the stock. The options contract buyer has the right to buy or sell 100 shares of stock at the strike price and the seller has the obligation to buy or sell the 100 shares at the strike price if the buyer initiates or exercises the option.

So a $274 Call would be profitable when the stock is $274 and above, plus the cost of the contract itself and the buyer could choose to exercise the option or buy the underlying shares of stock once it reaches that price.

A buyer can buy many stock option contracts for just the premium price, but the seller must have the stock available to sell or enough in their investment account to purchase 100 shares of the stock. If you sell a stock option and don't own 100 shares of the stock, the broker may hold the value of the 100 shares. This can be a pretty large amount so be prepared if you do plan to sell options. Pro tip: If you accidentally sell an option, you can purchase (buy) an identical option to undo it, this is called buy to close. Please be careful and get proper investment advice. If you don't understand what a buy to close is, please don't start trading or even listen to anything I say and start reading more about trading stock options and getting yourself more familiar with terms and the losses that can come from playing with stock options and not knowing what you're doing. There are tons of free resources available everywhere, do your homework, it's your money.

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