stock option
Stock Option is a contract giving you the right, not the obligation, to buy or sell a company's shares at an agreed price before a set date.
In plain English
Remember that landlord who told your uncle years back, pay me ₦2 million today and I will let you buy this small plot at that same price anytime in the next two years, no matter how much land prices rise. Your uncle did not have to buy it immediately. He just held that right in his pocket like a golden ticket, and if land prices doubled, he would smile all the way to the agreement. If they crashed, he could simply walk away and lose only the small fee he paid to hold that right.
A stock option works exactly like that arrangement, except the plot of land is shares in a company. When you buy a call option, you are paying a small fee, called a premium, for the right to buy a company's shares at a fixed price, called the strike price, before a certain date. If the share price rises well above that strike price, you exercise your right and pocket the difference. If it does not, you simply let the option expire and your loss is limited to the premium you paid.
There is also the put option, which is the opposite. It gives you the right to sell shares at a fixed price, which is useful if you think a stock is about to fall and you want to protect yourself or profit from the drop.
In Nigeria, options trading on individual stocks is not yet common on the Nigerian Exchange the way it is abroad, but many Nigerians in the diaspora encounter stock options through their employers in the United Kingdom or the United States, where tech and finance companies often give staff options as part of their pay package. A Nigerian software engineer working in London might be granted options to buy company shares at ₦0 equivalent cost beyond a fixed low price, and if the company grows, that option can turn into a serious nest egg, sometimes enough to send home and build that house in Enugu or Lekki everyone keeps talking about.
A UK based Nigerian engineer is granted options to buy 1,000 shares of her employer at £2 each. Years later the shares trade at £10. She exercises her option, buys at £2, sells at £10, and pockets £8,000 before tax, money she then converts and sends home at a rate that makes her mother very happy.
Questions people ask
Do I have to buy the shares once I own a stock option?
No. An option gives you the right, not the duty, to buy or sell. If exercising it does not make financial sense, you simply let it expire and you only lose the premium you originally paid.
Can ordinary Nigerian investors trade stock options like in Hollywood films?
Not easily on the Nigerian Exchange yet, since options trading there is limited compared to markets like the United States or United Kingdom. Most Nigerians encounter options through employer share schemes abroad rather than through local stockbroking accounts.
What happens if the share price never reaches my strike price before expiry?
The option simply expires worthless and you walk away having lost only the premium you paid for it, nothing more, which is the whole point of the limited risk that options offer.
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