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What is a stock option and what does it mean to buy an option?


A STOCK OPTION is a right granted by a company to purchase a specified number of shares of the company's stock at a specified price for a specified period of time.
You exercise your right to buy the option.

Globally Interested:

While some comanies grant stock options to their employees, most options are written and sold through the exchanges. The companies have no control over these options.
An option contract gives the buyer the right to purchase a stock at a given price (call option) or the right to sell a stock at a certain price (put option) for a certain period of time. The seller has the obligation to fulfill the option if the buyer wishes to exercise his option. The buyer, on the other hand, has the right to exercise the option but does not have the obligation to do so.
Currently Canadian Pacific stock is selling for $84.73. You can buy a n $85 call option good until Dec 22, for $6.40. So, if the stock goes above $91.13 then you would be ahead. On the other hand, if you owned Canadian Pacific stock and wished to sell the Dec $85 call option, you would get $5.60. The difference between the prices is called the spread.

Option trading can be very profitable, but is also very risky.

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