1. What Are Stock Options? | What Is A Stock Option?
What are Stock Options?
I was recently asked this question by a visitor to my web site,
www.optionsizzle.com.
You may have seen the term “stock options” in the financial
section while scanning the news. Or perhaps, you’ve
encountered the term as an employee and were offered stock
options in your company. So, what are stock options? Can these
options be used to your advantage? Yes! There are two different
types of stock options. Let me help you understand the difference.
What Are Stock Options – Employee Stock Option (ESO)
An Employee Stock Option (ESO) is a type of non-cash compensation that is typically issued to
management as part of an executive compensation package. Technically, an ESO is classified
as a non-standardized option because it has several differences from an exchange traded option.
The reason companies offer this type of compensation to management is because it provides
management with incentive to run the business well. The stock of a well-managed company with
good growth potential is likely to rise, rewarding the management team.
Here are some differences between an ESO and an exchange traded option:
1) An ESO may not be traded. That means that cannot be bought or sold in the open market on
any kind of exchange. An ESO is strictly issued from the company to the employee.
2) The quantity of the ESO is determined by the company and is not standardized like an
exchange traded option. The strike price or exercise price is usually the price of the company
stock.
3) The duration of an ESO varies and it can be many years to expiration, unlike an exchange
traded option that has a shorter life span to expiration.
What Are Stock Options – Exchange Traded Options
An Exchange Traded Option is a standardized contract that is traded over the counter on a
specific exchange. Standardized means that there is a standard set of rules governing the
trading of that exchange traded option. These are the types of options that you will typically only
have access to since they are traded on an exchange and available to the public.
1) Unlike an ESO, one standardized option contract represents one hundred shares. So if I
bought one Apple (AAPL) option contract, I would actually control one hundred shares of that

2. stock. If I decided to exercise that contract, then I would be purchasing one hundred shares of
stock for every one option contract I exercised.
2) There are two types of standardized option contracts. You can be a buyer or a seller of an
option and each gives you specific rights or obligations. To keep it simple in the example below, I
will explain only the concept of buying the two types of options.
A call option gives you the right to buy the underlying asset (stock or future) at a set strike price.
It is a right and not an obligation. You pay a premium or deposit for the option contract which
gives you the right to own the stock at a set price on or before a set date. When you buy a call
option, you expect the price of the underlying asset to go higher in order for the option contract to
become profitable. What you have at risk is only the premium that you paid for the option
contract. So, in the case of purchasing a home, you would put down a deposit to show the seller
you were a serious buyer. If a few days later a tornado destroyed the house, you would lose only
your deposit amount and not the full value of the home. I know there are probably ways to get
your deposit back, but I wanted to give you a visual.
A put option gives you the right, but not the obligation, to sell the underlying asset (stock or
future) at a set price on or before a set date. You pay a premium or deposit to own that right to
sell. When you buy a put, you want the value of the underlying asset to go lower in order for you
option to become profitable. Buying a put option is referred to as shorting the underlying asset.
Many refer to put options as insurance. Recall the example above of the house destroyed by the
tornado. If you were the seller of that house, then you would have paid an insurance premium to
recoup the full value of the intact house and not the current, lower value of the destroyed house.
The cost to you of rebuilding the house to its former state is the insurance premium you paid and
nothing more.
3) An option contract has a determined expiration date on which the option will expire. Option
buyers need to exercise (or sell) the stock option before this date. An option which has a long
time to expiration is more expensive than an option with a shorter expiration date.
4) An option contract has an agreed price which is called the strike price. The strike is the price
at which buyers of call options can buy the stock prior to expiration. It is also the price at which
buyers of put options can sell the stock.
What Are Stock Options – My Tips
1) A stock option is usually bought at a significantly lower price than the actual price of the
underlying asset, so you don’t have to put up as much money to control the same amount of
shares as if you were buying the underlying asset. This is one of the reasons why I use options
than the underlying asset.
2) Because of the tremendous amount of leverage and the amount of shares you can control with
options, you have to be extra careful. There are many components to the pricing of options. Keep
in mind that over ninety percent of option contracts expire worthless so if you are thinking of

3. putting your entire account in one option contract, then you might not have a account in the
future.
3) The market trend will usually dictate which type of stock option to buy. If the market is in an
uptrend, you would look to buy calls. Alternatively, if the market is in a downtrend, then you
would look to buy puts.
Trading stock options may sound complicated, but it is much easier than it seems once you
master some basic terminology and techniques. All the actual paperwork of the option contract is
handled through brokers and stock exchanges. All you have to do is to consult with your financial
advisor on whether it’s a good time to buy or to sell stock options. It is important that you
understand how the system works, so that you manage your risk and don’t incur great losses.
What Are Stock Options Conclusion:
There you go! I hope you enjoyed this article about what are stock options!
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