What is a stock option?

• A. An instrument that guarantees a fixed return no matter what.
• B. A loan secured by shares.
• C. Affords the holder the opportunity, but not the obligation, to buy or sell stock at an agreed-upon price within a certain period or on a specific date.
• D. A right to vote at shareholder meetings.

Answer: (C)

Stock options are contracts that give the holder the right, but not the obligation, to buy or sell a specific number of shares at a predetermined price (the strike price) within a specified time frame or on a specific date. This right can be exercised if it’s advantageous to do so before the option expires, and if not, the option may simply expire worthless. There are two main types: calls, which give the right to buy, and puts, which give the right to sell. The price paid to acquire the option is called the premium, and the option’s value rises or falls with the stock price, time to expiration, and volatility. This description fits the choice that describes an opportunity to buy or sell stock at an agreed-upon price within a window, rather than guaranteeing returns, securing a loan, or providing a voting right.