Meaning of options in the stock market. In the stock market, a stock option is an agreement between two parties that contains the right for the option investor to buy (call) or sell (put) assets based on the agreement.
This agreement is made at a time and price that has been mutually agreed upon at the beginning which is commonly referred to as a standard contract or Exchange-Traded Options (ETO). These ETOs are traded on exchanges and guaranteed by clearing houses.
Stock Options Have Several Uses – Meaning of options in the stock market #1
Stock options have several uses, namely as a risk management tool. Investors who have stock options on an underlying asset can hedge by delaying the sale of their shares if the price of the underlying asset suddenly drops drastically. Thus, people who have stock options can avoid the risk of loss.
This is because there is a flexible time limit, especially for the type of stock option in America where the call or put option holder can determine whether or not to exercise their rights until the expiration date.
What is Options? Meaning of options in the stock market #2
Options are freedom for a person or a party to make choices which are the rights of the person or party concerned to own, buy, sell or rent goods or services based on certain conditions. While stock options are one of the derivative products that are widely traded in countries that have advanced capital market conditions.
The effect of stock prices and option exercise prices on the value of stock options, both call options, and put options, can be explained by calculating the intrinsic value of stock options. The time until the exercise of the option and the volatility of the stock price in the market has a positive relationship with the value of both call and put stock options.
The longer the time to execution and the higher the volatility of the stock price in the market, the more valuable the call option or put option is. The risk-free interest rate has a positive relationship with stock call options and conversely has a negative relationship with stock put options.
Dividend payments will affect the price of call options and put options. In essence, the value of the option holder (option holder) will increase when the volatility of the stock as the underlying asset increases as well.
The existence of executive stock options significantly affects the volatility of the company’s stock returns. The value of the option will increase as the volatility and maturity increase as well.