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The Many Meanings of Options in the Stock Market

You don't have to go around fishing haphazardly for options in the stock market if you do a little research.

You don’t have to go around fishing haphazardly for options in the stock market if you do a little research.

The word options in stock market lingo is similar to the word up in the English language: You think you understand its simple definition until you hear it used in so many different ways that its meanings become more a matter of usage than clear definition. Context becomes very important. When talking about the stock market and someone says they have options, they might not just mean they have “choices” about what to do with their money.

That is, however, probably the first way you will hear the word used when learning about the stock market. There are decisions to be made because there are options about which companies to invest in. Learning things that make you better informed to distinguish between such choices makes the array of these sort of options less mystical and scary. Using the word this way, it has no special connection to the stock market, other than as a basic word indicating that decisions will be made, one way or another, about what you do with your money. The main options are:

  • spend it
  • hide it
  • give it away
  • manage it

The second most common way you will hear the word options used is when talking about buying or selling an agreed upon circumstance to buy or sell. This is generally referred to broadly as the options market. In other words, you buy or sell the option to buy or sell a given stock if certain conditions prevail in the market in which stocks are bought and sold.

This kind of interaction between investors may or may not have anything to do with the actual value of the company in question. It is more a measure of whether or not the parties involved suspect the price of the shares to fluctuate in a certain direction within a given period of time. The terminology for this buying and selling of opportunity is specific and beyond what I am going to discuss here, but if you want to try to understand it, I suggest you first give yourself time to acclimate to more basic stock market language, as well as overall stock market phenomena. After that is done, it will be easier to grasp the intricacies of the options market submarket of the stock market.

A third type of options is what a company will sometimes give to an employee as part of his (gender inclusive pronoun, fyi) compensation. Usually, some stock is set aside for the employee at a certain price. He can then consider buying the stock after a designated period of time if it seems to him to have value. This is thought to be an incentive for the employee to work in ways that increase the overall value of the company, so that the stock will be worth more on the open stock market, but he can buy it from the employer at the previously (hopefully) lower price. The employee must wait for a specified amount of time before actually taking ownership of these options, so it is also a way to influence the more skilled employees to stay with the company. There is nothing under handed or secretive about this. It is not unlike someone who works for a clothing store getting discounts on purchases. When an employee does buy these types of options, it is called “exercising them.” There are specific tax regulations regarding such options (see #9 in this article).

The key to knowing what someone means when they talk about options in regard to the stock market is listening to a few sentences. If you still aren’t sure, don’t be afraid to ask, because like in any area of specialization, those who are more familiar with the terms tend to use short cuts in speaking. Don’t feel stupid if you get confused, because even those who “know” what they are talking about, often need clarification during communication, because there is more than one meaning for options in the stock market.

 

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