Underlying Stock
The underlying stock is the actual share that gives an option its value. When an investor buys a call or put option, that contract is linked to a particular company’s stock - known as theunder lying security.
If the option is exercised, the underlying stock is the asset that is bought (for call options) or sold (for put options) at the agreed strike price.
Movements in the price of the underlying stock directly affect the option’s premium, because the stock’s price determines whether the option is in the money, at the money, or out of the money.
Understanding the relationship between an option and its underlying stock is fundamental to how options are priced and traded, but outcomes are not guaranteed.
Why the underlying stock matters to investors
Understanding the underlying stock helps investors:
● Identify factors that influence an option’s value
● Assess exposure to a specific company or market
● Observe how share price movements affect option pricing
● Recognise how stock performance interacts with overall option value
The underlying stock is the foundation of every equity option - its movements affect the option’s value, and the potential for loss, including the full premium paid. Options may not be suitable for all investors.