stock option

A right to buy or sell specific securities or commodities at a stated price within a specified time.

A privilege, sold by one party to another, that gives the buyer the right, but not the obligation, to buy (call) or sell (put) a stock at an agreed-upon price within a certain period or on a specific date.

In the U.K., it is known as a "share option".

Investopedia Says:
American options can be exercised anytime between the date of purchase and the expiration date. European options may only be redeemed at the expiration date. Most exchange-traded stock options are American.

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Right given the holder to buy a specified number of shares of stock at a certain price by a particular date. Stock option plans are often used to compensate corporate officers and other employees for specific services. Under a compensatory stock option plan, compensation should be expensed in the periods in which the related services are actually performed. Compensation is measured by the quoted market price of the stock at the measurement date less the option price the employee is to pay. The measurement date is the earliest date on which both the number of shares to be issued and the option price are known. Assume 2000 shares are under option, market price at measurement date of 1/1/2000 is $15, option price is $10, par value is $6, and there is a four-year benefit period. Deferred compensation equals $10,000 (2000 shares x $5). The entry at the measurement date is:

1/1/2005 Deferred compensation 10,000

Stock options 10,000

On 12/31/2005, the entry is:

12/31/2005 Compensation expense 2,500

Deferred compensation 2,500

Deferred Compensation is a contra account to stock options in the capital stock section of stockholders' equity, shown as follows on 12/31/2005:

Stock options $10,000

Less: Deferred compensation 7,500

Balance $ 2,500

If the market price of stock on the exercise date exceeds the option price, the employee will exercise. Otherwise, the employee will not. Assume the market price is $23 a share upon exercise of the options. The entry is:

Cash ($10 x 2000) 20,000

Stock options 10,000

Common stock (2000 x 6) 12,000

Paid-in capital 18,000

Note the employee pays only $10 (option price), not the current market price of $23. Footnote disclosures in a stock option plan include the number of shares under option, option price, number of shares exercisable, and shares issued under the option during the year.

For more information on stock option, visit Britannica.com.

The granting to an individual of the right to purchase a corporate stock at some future date at a price specified at the time the option is given rather than at the time the stock is obtained. The option may be purchased or sold, as in a call option, or may be granted to an individual by the company as in an employee stock option. The option will always involve a specified number of shares, state a time period within which it may be exercised and state a price to be paid upon exercise. A put option is the reverse of a call option in that the holder has a right to compel the seller of the option to purchase his shares at a fixed price during a set time period for a predetermined price per share.

Stock options involve no commitments on the part of the individual to purchase the stock and the option is usually exercised only if the price of the stock has risen above the price specified at the time the option was given.

Stock options are a form of incentive compensation. They are usually given by a corporation in an attempt to motivate an employee or officer to continue with the corporation or to improve corporate productivity in a manner which will cause the price of the corporation's stock to rise and thereby increase the value of the option. See security; see also stock dividend.

nonqualified stock option for income tax purposes, an option which does not qualify as a qualified stock option. On exercise of a nonqualified stock option, the employee recognizes as ordinary income the difference between the option price and the fair market value of the stock. Subsequent sale or exchange of such stock will constitute the sale or exchange of a capital asset. I.R.C. §421 et seq.

qualified stock option for income tax purposes, an option which qualifies for favorable tax treatment. If an employer gives its employee the right to purchase stock in the employer corporation at the price the stock was selling at the time of the option and meets certain other requirements, such grant of an option constitutes a qualified stock option. If the employee exercises such qualified stock option by buying the stock at some time in the future, the employee will not recognize income on the difference between the option price and the value of the stock when such option is exercised. Moreover, if the employee holds the stock for more than a certain period of time, the gain recognized on a sale or exchange of the stock will be taxed as a capital gain or loss. I.R.C. §§421 et seq.

The right to purchase a company's shares at a future date at an agreed price. Companies often give stock options to their executives as an incentive to improve the company's performance and boost its share price. If the share price has risen above the agreed price of the option by the time the option is exercised, the executive stands to make a considerable profit.