option
The right, but not the obligation, to buy (for a call option) or sell (for a put option) a specific amount of a given stock, commodity, currency, index, or debt, at a specified price (the strike price) during a specified period of time. For stock options, the amount is usually 100 shares. Each option has a buyer, called the holder, and a seller, known as the writer. If the option contract is exercised, the writer is responsible for fulfilling the terms of the contract by delivering the shares to the appropriate party. In the case of a security that cannot be delivered such as an index, the contract is settled in cash. For the holder, the potential loss is limited to the price paid to acquire the option. When an option is not exercised, it expires. No shares change hands and the money spent to purchase the option is lost. For the buyer, the upside is unlimited. Options, like stocks, are therefore said to have an asymmetrical payoff pattern. For the writer, the potential loss is unlimited unless the contract is covered, meaning that the writer already owns the security underlying the option. Options are most frequently as either leverage or protection. As leverage, options allow the holder to control equity in a limited capacity for a fraction of what the shares would cost. The difference can be invested elsewhere until the option is exercised. As protection, options can guard against price fluctuations in the near term because they provide the right acquire the underlying stock at a fixed price for a limited time. risk is limited to the option premium (except when writing options for a security that is not already owned). However, the costs of trading options (including both commissions and the bid/ask spread) is higher on a percentage basis than trading the underlying stock. In addition, options are very complex and require a great deal of observation and maintenance. also called option contract.
Mentioned in these terms
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binary option
Black Scholes option-pricing model
at-the-money option
out-of-the-money option
Margrabe option
Asian option
in-the-money option
Barone Adesi & Whaley Model
diagonal spread
best of two option
rainbow option
worst of two option
AC-DC option
zero cost option
American option
butterfly spread
credit spread option
call processing
atlantic spread
at-the-money forward option
real option
option seller
extension clause
intracommodity spread
deep in money option
traded option
attributes data
externalities
deep out of money option
catastrophe equity put option
forward auction
fair market value (FMV) lease
reverse auction
standing order
fallback position
London International Financial Futures & Options Exchange (LIFFE)
collar agreement
bargain purchase option
fax back
determinism
Committee on Uniform Security Identification Procedure (CUSIP) number
preemption right
developmental license
underwater option
purchase option
fixed purchase option
loss damage waiver (LDW)
variable rate demand obligation (VRDO)
compound option
Bermuda option
purchase with purchase
digital option
variables data
compressed workweek
Quanto option
foreign exchange option
scrip dividend
freeware
concept search
best practicable means
doctrine of constructive receipt
voidable
FTSE 100
bet option
security
married put
double hedging
configuration management
derivative security
modular bill of materials
due process
adjustable rate preferred (ARP) stock
Garman Kohlhagen model
electronic purse
all or nothing option
alternative dispute resolution
costless collar
box option
one touch option
equity warrant
counter-offer
bull spread
strangle
Black Scholes option-pricing model
at-the-money option
out-of-the-money option
Margrabe option
Asian option
in-the-money option
Barone Adesi & Whaley Model
diagonal spread
best of two option
rainbow option
worst of two option
AC-DC option
zero cost option
American option
butterfly spread
credit spread option
call processing
atlantic spread
at-the-money forward option
real option
option seller
extension clause
intracommodity spread
deep in money option
traded option
attributes data
externalities
deep out of money option
catastrophe equity put option
forward auction
fair market value (FMV) lease
reverse auction
standing order
fallback position
London International Financial Futures & Options Exchange (LIFFE)
collar agreement
bargain purchase option
fax back
determinism
Committee on Uniform Security Identification Procedure (CUSIP) number
preemption right
developmental license
underwater option
purchase option
fixed purchase option
loss damage waiver (LDW)
variable rate demand obligation (VRDO)
compound option
Bermuda option
purchase with purchase
digital option
variables data
compressed workweek
Quanto option
foreign exchange option
scrip dividend
freeware
concept search
best practicable means
doctrine of constructive receipt
voidable
FTSE 100
bet option
security
married put
double hedging
configuration management
derivative security
modular bill of materials
due process
adjustable rate preferred (ARP) stock
Garman Kohlhagen model
electronic purse
all or nothing option
alternative dispute resolution
costless collar
box option
one touch option
equity warrant
counter-offer
bull spread
strangle
optional dividend
antidilution clause
informal entry
Cox, Ross, & Rubinstein Option-Pricing Model
strike vote
optionee
request for information (RFI)
credit derivative (CD)
optioner
exchangeable option
integrated planning
team roles
option fund
asymmetric risk exposure
intercommodity spread
cross-currency option
theory of the second best
European option
vertical spread
currency option
theta
closed-end lease
underlying
lookback option
commodity pool
bear spread
major market index
forward cover
configuration
abandonment
mezzanine financing
convertible preferred stock
capital lease
calendar spread
cash and carry
traditional option
appropriation
swaption
open interest
option holder
daily trading limit
legal tender
long straddle
gamma
decision making
spread option
European-style option
time value
foreign exchange contract
straddle
option spread
trading halt
short straddle
exercise price
option writer
delta
cash market
incentive stock option
call
intrinsic value
futures exchange
margin requirement
downside
callable bond
trading floor
expiration date
financial markets
hedge
exercise
default
futures contract
mutual fund
antidilution clause
informal entry
Cox, Ross, & Rubinstein Option-Pricing Model
strike vote
optionee
request for information (RFI)
credit derivative (CD)
optioner
exchangeable option
integrated planning
team roles
option fund
asymmetric risk exposure
intercommodity spread
cross-currency option
theory of the second best
European option
vertical spread
currency option
theta
closed-end lease
underlying
lookback option
commodity pool
bear spread
major market index
forward cover
configuration
abandonment
mezzanine financing
convertible preferred stock
capital lease
calendar spread
cash and carry
traditional option
appropriation
swaption
open interest
option holder
daily trading limit
legal tender
long straddle
gamma
decision making
spread option
European-style option
time value
foreign exchange contract
straddle
option spread
trading halt
short straddle
exercise price
option writer
delta
cash market
incentive stock option
call
intrinsic value
futures exchange
margin requirement
downside
callable bond
trading floor
expiration date
financial markets
hedge
exercise
default
futures contract
mutual fund
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