What are stock options?

Stock options are contracts that grant an individual the right, but not the obligation, to purchase shares of a company at a predetermined price, known as the exercise price or strike price. This means that the holder of the option can buy shares at this fixed price even if the market price of the shares increases over time.

This mechanism is particularly attractive because it can provide significant financial benefits if the company's stock performs well, making the ability to purchase at the set price valuable. Stock options are often utilized as a form of incentive compensation, allowing employees to benefit directly from the company's growth and align their interests with those of shareholders.

In contrast, the other options do not accurately reflect the nature of stock options. The first option pertains to purchasing company bonds, which are debt instruments, not equity. The second option refers to contracts for future cash bonuses, which are unrelated to stock ownership. The fourth option suggests that shares are granted as part of a salary package, which describes restricted stock units or direct stock grants, not stock options. Thus, the correct definition of stock options is succinctly captured in the response that identifies them as contracts to purchase shares at a set price.