Stock Options — Market Explainer Video

Transcript

Start with the underlying

A stock option references shares in a company. Calls give the holder a purchase right; puts give a sale right, subject to the contract rules. The company share price is the underlying, while the option has its own separate market price.

A standard contract

A standard U.S. equity option typically represents one hundred shares. A premium of two dollars means two hundred dollars per contract before fees. Corporate actions can create adjusted contracts, so always check the actual multiplier and deliverable.

Company events matter

Earnings, dividends, takeover news, and other company events can move the stock and its implied volatility. An option might become more expensive before an uncertain event, then lose volatility value afterward even if the stock moves in the expected direction.

Exercise can create shares

Standard U.S. stock options generally use American exercise and physical share settlement. An assigned call seller delivers shares; an assigned put seller buys shares. A resulting stock position can require substantial funding and brings its own ongoing risk.

Price, contract, and exposure

Before using a stock option, check the company event calendar, liquidity, spread, multiplier, and exercise terms. The premium may be a fraction of the share value, but the exposure and potential obligations can be much larger.