What do stock options provide to their holders?

Stock options grant their holders the right to buy (or in some cases, sell) shares of stock at a predetermined price, known as the exercise or strike price, before a specified expiration date. This means that if the market price of the stock increases above the strike price, the holder can purchase the stock at the lower strike price and potentially realize a profit by selling it at the higher market price.

This mechanism incentivizes employees or investors by allowing them to benefit from increases in the company's stock value without needing to purchase the shares outright at the current market price. The other options do not accurately describe stock options. For instance, obligations to purchase shares or exchange shares for dividends do not apply to stock options, nor do they provide opportunities to invest in mutual funds. Each of these choices addresses different financial instruments or concepts separate from what stock options represent.