Stock Option Law and Legal Definition

Stock options is a contract that gives the right, but not the obligation, to buy a certain amount of shares in the company at a predetermined price. Options themselves are traded as securities on stock exchanges. Stock options for the company's own stock are often offered to upper-level employees as part of the executive compensation package, especially by American business corporations.

Every stock option sets forth:

* Name of the associated stock
* Strike price
* Expiration date
* The premium paid for the option, plus brokers commission.

The two most popular types of options are Calls and Puts. Generally, owning a call gives you the right (but not the obligation) to purchase a stock at the strike price any time before the option expires. An option is worthless and useless after it expires. Owning a put gives you the right (but not the obligation) to sell a stock at the strike price any time before the option expires. If you have written a put (you are short a put), you have the obligation to buy shares at the strike price any time before the expiration date if you get get assigned.

Stock options granted to specified employees of a company, are slightly different from regular options, because they don't have puts and you typically must wait a specified period before you are allowed to exercise the option.