What is the purpose of a stock option?

The purpose of a stock option is to allow the holder to buy or sell shares at a predetermined price. This financial instrument provides an opportunity for the holder to benefit from changes in the price of the underlying stock. A stock option typically comes with a set expiration date, and the predetermined price, known as the exercise or strike price, is established at the time of the option granting.

When the market price of the stock exceeds the exercise price, the holder can purchase shares at the lower strike price, realizing a profit. Conversely, if the market price falls below the strike price, the holder may choose not to exercise the option, as it would not be advantageous. This flexibility is crucial for investors and employees (often in the case of employee stock options) as it aligns interests between stakeholders and the company's performance.

In context, while other options mention lending rights or guaranteed salaries, they do not relate to the fundamental purpose of stock options, which revolves around the rights to buy or sell shares for profit within specified parameters.