Companies may also issue their shareholders with options. If you receive an option, you have the right to acquire shares in the company at a specified price on a stipulated date. You are also able to trade these options on the stock exchange or allow them to lapse.
Options are similar to rights and the terms are often used interchangeably. The main difference between options and rights is that options can usually be held for a much longer period than rights before they lapse or must be exercised. Options may also be issued initially to both existing shareholders and non-shareholders while rights can only be issued initially to existing shareholders.
Exchange traded options are types of options that are not created by the company but by independent third parties and are traded on the stock exchange. They come in two forms:
- call option is a contract which entitles its holder to buy a fixed number of shares in the designated company at a stated price on or before a specified expiry date
- put option is a contract which entitles its holder to sell a fixed number of shares in the designated company at a stated price on or before a specified expiry date.
The taxation of options is similar to that of rights. Unless you deal with them regularly, the only tax consequences that may arise involve the capital gains tax measures.
This is discussed in detail in the publication Personal investors guide to capital gains tax.