What are stock options?

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Stock options are options that have stocks as their underlying product. So, a call option on say Microsoft shares gives its owner the right, but not the obligation, to buy the some Microsoft stock at a certain price (namely, at the option strike price). Stock options can be struck on any share, including ETFs. Stock options make up a huge proportion of all options traded globally. As with all options, they are used by investors and speculators to gain exposure to the price movement of the underlying product. They can be used to hedge an existing position in the stock or to gain a leveraged speculative position in either the price of the stock or in the volatility of the price of the stock.

Stock options can be affected by certain factors that do not affect all other options. For example, dividend payments made by the underlying company, whether ‘normal’ or ‘special’, can affect the stock options’ values. Also stock options can be affected considerably by any ‘special situation’ relating to the underlying company, such as a merger or acquisition or bankruptcy.

Stock options trade on most of the major derivatives exchanges around the world. Most have a contract multiplier, which means that each option gives its owner the right to trade a certain number of lots of the underlying product. For example a call stock option with a multiplier of 100, allows its owner on exercising to buy 100 lots of the underlying product.

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