What constitutes a "stock option"?

A stock option is fundamentally defined as a right granted to an individual to purchase shares of a company's stock at a predetermined price, commonly referred to as the "exercise" or "strike" price, within a specified timeframe. This instrument allows the holder to benefit from the appreciation of the stock by giving them the opportunity to acquire shares at a price lower than the market value at the time they decide to exercise the option.

The mechanics of stock options are designed to incentivize employees, align their interests with those of shareholders, and provide potential for profit if the company's stock performs well. This financial tool is crucial in the context of employee compensation packages, startups, and overall corporate finance strategy.

The other options do not accurately reflect the nature of stock options. Selling shares at market price is a different financial transaction and does not involve the right to purchase at a predetermined price. An obligation to buy shares indicates a commitment rather than a right, which is contrary to the voluntary nature of an option. Lastly, a guarantee of dividend payments is unrelated to stock options, focusing instead on the stability of returns from ownership of stock rather than the potential for future acquisition of that stock.