“In the money” (ITM) is a phrase that is used to refer to an option that has intrinsic value: a measure of what an asset is worth by performing an objective calculation and financial analysis, rather than looking at an asset’s current trading price. When a contract is written, it establishes the price, known as the strike (exercise) price, that the underlying stock must reach to be “in the money” (ITM). In exchange for the payment, the buyer is given the right (option) to buy or sell a specified investment from or to the other party at a predetermined price at a specific time. The option buyer pays a premium to the option writer (the person selling the derivative). In the case of stock options, that asset is shares of a company’s stock.Įssentially, an option is a security sold from one investor to another. Stock options are a financial instrument (monetary contracts between parties) known as a derivative, which derives its value from an underlying security or rate. ESOs function like a regular call option, rewarding the holder the right to purchase the underlying asset (the company’s stock) at a specified price for a specific time.

Generally, one options contract represents 100 shares of the underlying stock.Įmployee stock options (ESOs) are a type of alternative compensation that many companies, including many startups, offer as a part of their benefits package for employees. There are two primary types of options contracts: puts, which is a bet that the stock price will fall, and calls, which is a bet that a stock will rise.

Stock options are a form of equity compensation that gives the investor the right to buy a stock at a fixed price over a finite period of time.

Options definition