Definition of Stock Options

An option is a derivative instrument that gives the holder an option (non-obligatory) in other words a choice (a right to make a choice) while buying or selling financial security. A share option will give the option holder a right but there will be no obligation to buy or sell shares at a given price called the strike price, on a certain future date called exercise date.

A stock option can be a put option or a call option. When a trader thinks that the price of a certain stock will increase from $300 in future. To save himself from this increase he might decide to buy a call option that will give him the right to buy that share for $300 that he will exercise only if the price for that stock goes up than $300. But if the price falls below $300 he will not exercise the call option and buy at a lower rate than $300.

On the other hand, if a trader has already a share worth $50 that he wants to sell in future but thinks that the share price might fall below $50 and he may not earn a higher profit by selling it at a lower rate. So he decides to buy a put option that will give him the right to sell the stock at $50 in the event the share price falls below $50. But if the price increases from $50 he will sell the share at a market rate and not exercise the put option.