Stock option

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Stock option

Stock Option

A non-tradeable call option giving an employee at a publicly-traded company the right to buy shares in that company for a certain price. Stock options in this sense are often a part of compensation for major and mid-level executives in large publicly-traded companies. If the share price for the company increases, stock options can be very profitable for the employee. These stock options have certain rules governing when and how the option can be exercised.

stock option

An option to buy or sell a specific number of shares of stock at a fixed price until a specified date. See also call, capped-style option, incentive stock option, put.

Stock option.

A stock option, or equity option, is a contract that gives its buyer the right to buy or sell a specific stock at a preset price during a certain time period.

The exact terms are spelled out in the contract. The same contract obligates the seller, also known as the writer, to meet its terms to buy or sell the stock if the option is exercised. If an option isn't exercised within the set period, it expires.

The buyer pays the seller a premium for the privilege of having the right to exercise, and the seller keeps that premium whether or not the option is exercised. The buyer has the right to sell the contract at any point before expiration, and might choose to sell if the sale provides a profit. The seller has the right to buy an offsetting contract at any time before expiration, ending the obligation to meet the contract's terms.

Stock options are also a form of employee compensation that gives employees -- often corporate executives -- the right to buy shares in the company at a specific price known as the strike price. If the stock price rises, and an employee has a substantial number of options, the rewards can be extremely handsome.

However, if the stock price falls, the options can be worthless. Often, there are time limits governing when employees can exercise their options and when they can sell the stock. These options, unlike equity options, can't be traded among investors.

References in periodicals archive ?
As is widely known, stock options allow the holder of the option to buy a certain number of company shares at a certain exercise price for a set period of time.
That is, compensation cost arising from the issuance of stock options may be expensed or capitalized in the same way as cash compensation.
The transfer of interests in nonstatutory stock options and in nonqualified deferred compensation from an employee spouse to a nonemployee spouse incident to a divorce does not result in a payment of wages for FICA and FUTA tax purposes.
For a senior executive, the asset that best fits this description may well be a compensatory stock option.
Stock options will and should continue to be a major component of executive compensation, given the potential for superior long-term wealth-creation power for executives and the benefits for shareholders.
But we'll be using a combination of restricted stock and stock options.
In 2006, W exercises her stock options and receives stock with a value in excess of the exercise price.
The transfer of non-statutory stock options from the employee spouse to the non-employee spouse is not a taxable event.
As already noted, the information relating to the spread arising from the exercise of nonqualified stock options is fully reported in Boxes 1, 3, and 5 of Form W-2.
But such plans are being scrutinized by shareholders, the government, the FASB, and the SEC, partly because of concerns that CEOs are paid too much and that complex stock options are not clearly explained in proxy and registration statements.