option
Definition
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.
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Related Terms
derivative, security, exercise, covered option, uncovered option, writer, class of options, type, at the money, in the money, close to the money, deep in the money, out of the money, deep out of the money, contract, exercise limit, early exercise, daily trading limit, aggregate exercise price, furthest month, nearby month, far option, back months, last trading day, interest rate option, open interest, ratio write, variable ratio write, underlier, series, American-style option, Asian option, assignment, average option, spread, bear spread, bull spread, butterfly spread, calendar spread, diagonal spread, credit spread, debit spread, horizontal spread, vertical spread, perpendicular spread, combination, ratio calendar combination, ratio calendar spread, ratio spread, Black-Scholes Option Pricing Model, break-even point, buy and write, called away, capped-style option, Chicago Board Options Exchange, conversion option, embedded option, listed option, lapsed option, expiration cycle, futures option, hedge, index option, intervals, knock-out option, automatic exercise, cashless exercise, foreign currency option, non-equity option, option exchange, option pool, option pricing curve, phantom option plan, physical option, registered options principal, reload option
'option
' appears in the definitions of these terms on BusinessDictionary.comAsian option, butterfly spread, out-of-the-money option, Margrabe option, Black Scholes option-pricing model, and 
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