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	== See also ==		== See also ==
	* [[Financial Economics]]		* Financial Economics
	* [[Labour Economics]]		* Labour Economics
	* [[Industrial Organization]]		* Industrial Organization

	== References ==		== References ==

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A '''stock option''' is a contract that gives the holder the right, but not the obligation, to buy or to sell a share at a specified price within a specified period. Stock options are used for hedging, for speculation, and for the compensation of employees.

== Types ==
A call option gives the holder the right to buy the share at the strike price. A put option gives the holder the right to sell the share at the strike price.

The options may be American, exercisable at any time before the expiry, or European, exercisable only at the expiry. The value of the option depends on the price of the share, on the strike price, on the time to expiry, on the volatility of the share, and on the interest rate.

== Valuation ==
The valuation of options is based on the no-arbitrage principle, since the payoff of an option can be replicated by a combination of the underlying asset and of a risk-free bond. The Black-Scholes model provides a formula for the value of a European option, based on the assumptions of the model.

The model assumes that the price of the share follows a geometric Brownian motion, that the volatility is constant, and that there are no transaction costs or dividends. The assumptions are restrictive, and the extensions of the model address some of them.

The valuation of options is central to the analysis of financial markets, and it is used in the pricing of a wide range of derivatives.

== Employee Compensation ==
Stock options are used as a form of compensation for employees, particularly for executives and for employees of start-up firms. The options give the employees the right to buy shares at a specified price, which provides an incentive to raise the value of the firm.

The use of stock options for compensation has been criticised on several grounds. The options can encourage the managers to take excessive risks, since the payoff is asymmetric, and they can encourage the manipulation of the timing of the awards.

The accounting treatment of stock options has been a subject of debate. The recognition of the cost of the options in the financial statements affects the reported earnings and the assessment of the compensation.

== Uses ==
Stock options are used for hedging, to protect against adverse movements in the price of a share. They are used for speculation, to bet on the direction of the price. They are also used in the design of structured products, which combine options with other instruments.

The uses of options are central to the functioning of financial markets, and they are the subject of the analysis of derivatives and of risk management.

== The Options and the Corporate Governance ==
The stock options are used in the compensation of the executives, and they affect the incentives and the behavior of the managers.

The options give the managers the incentive to raise the value of the firm, since the payoff depends on the price of the shares. The use of the options can align the interests of the managers and of the shareholders.

The options can also create the incentive to take the excessive risk, since the payoff is asymmetric. The managers benefit from the increase in the price but are protected from the decline, which can encourage the risky strategies.

== The Accounting and the Disclosure ==
The accounting for the stock options has been the subject of the debate. The recognition of the cost of the options in the financial statements affects the reported earnings and the assessment of the compensation.

The standard setters have required the recognition of the cost, based on the fair value of the options. The requirement has improved the transparency and the comparability of the financial statements.

The disclosure of the options also includes the information about the terms and the conditions of the awards and the holdings of the executives. The disclosure informs the analysis of the compensation and of the incentives.

== The Market for the Options ==
The market for the options is part of the derivatives market, and it includes the exchange-traded and the over-the-counter instruments.

The exchange-traded options are standardised and cleared through the central counterparty, which reduces the credit risk. The over-the-counter options are negotiated privately and are subject to the credit risk of the counterparties.

The analysis of the market informs the understanding of the pricing and of the risk of the options. The market also provides the information about the expectations of the investors.

== Summary ==
Stock options are the contracts that give the right to buy or to sell the shares, and they are used in the hedging, the speculation, and the compensation. The analysis of the valuation, of the use in the compensation, and of the market informs the understanding of the options.

== See also ==
* [[Financial Economics]]
* [[Labour Economics]]
* [[Industrial Organization]]

== References ==

<ref name="r1">Finance texts on options and on derivatives.</ref>
<ref name="r2">Research on the valuation of options and on the Black-Scholes model.</ref>
<ref name="r3">Analyses of the use of stock options in compensation.</ref>

<references />

[[Category:Financial economics]]
[[Category:Labour economics]]
[[Category:Industrial organization]]

Stock Option - Revision history

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