What You Need to Know About Stock Options (2024)

FAQs

What you need to know about stock options? ›

Stock options are a form of equity compensation that allows an employee to buy a specific number of shares at a pre-set price. Many startups, private companies, and corporations will include them as part of a compensation plan for prospective employees.

Rule 5: Do not Trade with Borrowed Funds

When you trade with borrowed funds, you will be under tremendous additional pressure. This is because repaying the amount will become very difficult if you incur a loss from your trades.

Exercising a stock option means purchasing the issuer's common stock at the price set by the option (grant price), regardless of the stock's price at the time you exercise the option.

Options trading means buying or selling an asset at a pre-negotiated price by a certain future date. You can get started trading options by opening an account, choosing to buy or sell puts or calls, and choosing an appropriate strike price and timeframe.

A call option gives you the opportunity to profit from price gains in the underlying stock at a fraction of the cost of owning the stock. Put option: Put options give the owner (seller) the right (obligation) to sell (buy) a specific number of shares of the underlying stock at a specific price by a specific date.

A stock option is the right to buy a specific number of shares of company stock at a pre-set price, known as the “exercise” or “strike price.” You take actual ownership of granted options over a fixed period of time called the “vesting period.” When options vest, it means you've “earned” them, though you still need to ...

A Bull Call Spread is made by purchasing one call option and concurrently selling another call option with a lower cost and a higher strike price, both of which have the same expiration date. Furthermore, this is considered the best option selling strategy.

Buying Calls Or “Long Call”

Buying calls is a great options trading strategy for beginners and investors who are confident in the prices of a particular stock, ETF, or index. Buying calls allows investors to take advantage of rising stock prices, as long as they sell before the options expire.

What not to do when trading options? ›

If you're looking to get started, you could start trading options with just a few hundred dollars. However, if you make a wrong bet, you could lose your whole investment in weeks or months. A safer strategy is to become a long-term buy-and-hold investor and grow your wealth over time.

In many cases it can be advantageous to exercise your stock options early (provided you have the cash, and assuming you believe in the company given you accepted a job there). The first benefit of exercising early is that you will likely have zero (or very little) tax liability at the time of exercise.

Often it is more profitable to sell the option than to exercise it if it still has time value. If an option is in the money and close to expiring, it may be a good idea to exercise it. Options that are out-of-the-money don't have any intrinsic value, they only have time value.

But overall, if your vested stock options are not exercised before the expiration of the post-termination exercise period, they expire and are canceled. And in many cases, you will miss out on tax advantages by waiting because ISOs turn into non-qualified stock options (NSOs).

When trading options, traders must understand the dynamics of option pricing and how they work. For instance, indicators such as the delta, gamma, vega and theta of an option should be second nature to you. If you aren't familiar with the “Greeks” of options trading, it's best to understand them before getting started.

Stock options give employees a share in the potential upside of the company's success. They are high-risk, high-reward compensation. You don't know how much they will be worth when they're first issued. But if the company does well, employees with large option grants stand to gain significantly.

Options can be a better choice when you want to limit risk to a certain amount. Options can allow you to earn a stock-like return while investing less money, so they can be a way to limit your risk within certain bounds. Options can be a useful strategy when you're an advanced investor.