What’s the point of Stock F&Os?



Future contracts make sense for commodities but I just don’t get it. What’s the point of Stock options and how does it add value irl?

In: Economics

Stock Options were used primarily as a way to align managements interests with those of the shareholders, allowing them to make money if the company does well. They are also traded on the open market as both an insurance policy and a way to manage risk.

Management example: John is a manager for Pubco, which is a public company traded on the open market. Because John is a senior manager the company will want to make sure John makes the right decision to maximize shareholder value instead of the “safe choice” (which may not be as risky but also not as profitable). Therefore the board of directors will approve an option offering to John to align his interests with those of the shareholders.

Open market: John is an individual trader and wants to own Pubco but is afraid of the short-term prospects. In order to manage his risk, he purchases calls on Pubco that expire in two months, enough time, he believes, for any issues with the company to be reflected in the stock price.