What are stock options and can you lay out a scenario to explain it better? I am so confused by it.?

Question

I read about it, but i am still a little confused. Can someone try to put it in easy words. and maybe give me a scenario. I am a numbers person.

Thanks

Answer 1

Stock Opions are usually  are offerred by employers as incentives to employees

http://money.howstuffworks.com/stock-opt...

Let's look at a real world example to help you understand how this might work. Say Company X gives or grants its employees options to buy 100 shares of stock at $5 a share. The employees can exercise the options starting Aug. 1, 2008.

On Aug. 1, 2008, the stock is at $10. Here are the choices for the employee:

The first thing an employee can do is convert the options to stock, buy it at $5 a share, then turn around and sell all the stock after a waiting period specified in the options' contract. If an employee sells those 100 shares, that's a gain of $5 a share, or $500 in profit.

Another thing an employee can do is sell some of the stock after the waiting period and keep some to sell later. Again, the employee has to buy the stock at $5 a share first.

The last choice is to change all the options to stock, buy it at the discounted price and keep it with the idea of selling it later, maybe when each share is worth $15. (Of course, there's no way to tell if that will ever happen.)

Answer 2

Stock Options that you can buy or sell through your stock broker are;

CALL OPTION: A call option gives the buyer of the call the right, but not the obligation, to buy the underlying stock at the option’s strike price. The seller of the call is obligated to deliver (sell) the underlying stock at the option’s strike price to the buyer of the call when the buyer exercises his right.

PUT OPTION: A put option gives the buyer of the put the right, but not the obligation, to sell the underlying stock at the option’s strike price. The seller of the put is obligated to take delivery of (buy) the underlying stock at the option’s strike price to the buyer of the put when the buyer exercises his right.

I got these definitions from the glossary at;

http://www.redoption.com/resources.php

http://www.redoption.com/