Stock options are financial contracts that give investors the right, but not the obligation, to buy or sell a stock at a predetermined price (called the strike price) within a specific time frame. There are two main types: call options, which allow buying the stock, and put options, which allow selling the stock.

Options are commonly used for hedging, speculation, or generating income. For example, an investor who believes a stock’s price will rise may buy a call option to benefit from the upside with limited risk. Conversely, if they expect a stock to decline, they might buy a put option.

Each option contract typically represents 100 shares of the underlying stock. The price paid to purchase an option is called the premium. If the stock reaches a favourable price before the option expires, the holder may exercise it or sell it for profit. If not, the option may expire worthless, resulting in a loss limited to the premium.

Companies also offer stock options to employees as part of compensation packages, giving them the right to buy shares at a fixed price, incentivising long-term performance and loyalty. Overall, stock options are versatile tools but require careful understanding due to their complexity and risk.