
Related to option: stock option, call option, put option


A privilege, for which a person has paid money, that grants that person the right to purchase or sell certain commodities or certain specified Securities at any time within an agreed period for a fixed price.


An option is a type of contract that is used in the stock and commodity markets, in the leasing and sale of real estate, and in other areas where one party wants to acquire the legal right to buy something from or sell something to another party within a fixed period of time.

In the stock and commodity markets, options come in two primary forms, known as "calls" and "puts." A call gives the holder of the option the choice of buying or not buying stock or a commodities futures contract at a fixed price for a fixed period of time. A put gives the holder the option of selling or not selling stock or a commodities futures contract at a fixed price for a fixed period of time. Because an option only has value for a fixed period of time, its value decreases with the passage of time. Because of this feature, it is considered a "wasting" asset.

There are four parts to an option: the underlying security, the type of option (put or call), the strike price, and the expiration date. Take, for example, an "International Widget July 100 call." International Widget stock is the underlying security, July is the expiration month of the option, $100 is the strike price (sometimes referred to as the exercise price), and the option is a call, giving the holder of the call the right, not the obligation, to buy one hundred shares of International Widget at a price of $100. The holder of the call cannot buy the one hundred shares until the exercise date.

In the case of a commodity option, the right to purchase or sell pertains to an underlying physical commodity, such as a specific quantity of silver, or to a commodity futures contract. The period during which an option can be exercised is specified in the contract.

Stock option plans are used in business to reward employees. A stock option is a contract between the company and the employee giving the employee the right to purchase shares of company stock between certain dates at a price that is often fixed by the company or determinable by formula at the time the option is granted. For example, International Widget may issue an option to a key employee, which will allow the employee to purchase one hundred shares of stock at the fair market value at the grant date. The employee has five years in which to exercise that option. If the price increases above the grant-date fair market value, the employee will presumably exercise the option and realize an economic gain based on the spread between the fair market value at the grant date and the fair market value at the exercise date. If the price decreases after the option is granted, the employee will forgo exercising the option and thereby have no loss in economic value.

Options have a role in business outside the stock and commodity markets. In the law of contract, the option is a continuing offer to purchase or lease property. The offer is irrevocable for the stated period of time. Like most other contracts, the option contract is not terminated by the sub-sequent death or insanity of either party.

Options usually assume one of two forms. The seller can state to the purchaser, "If you pay me $500 today, I promise to sell Whiteacre to you for $50,000 on the condition that you pay the $50,000 within sixty days." If the purchaser pays the $500, a unilateral contract—an agreement in which there is a promise on only one side and a possibility of a performance by the other side—is created, and the offer is irrevocable. The seller of Whiteacre is obligated to perform if the purchaser pays the $50,000 within sixty days.

The second form of option contract is created when the seller states to the purchaser, "I offer to sell you Whiteacre for $50,000. This offer will remain open for sixty days if you pay $500 for this privilege." If the purchaser pays the $500, there is a collateral contract—an agreement made prior to, or simultaneous with, another agreement not to revoke the offer—and the seller is obligated not to revoke.

Acceptance of an option contract is operative when received by the offeror, rather than when sent. An option contract is interpreted strictly in favor of its creator and must be unequivocal and in accordance with the terms of the option. It is frequently said that "time is of the essence" in an option contract, but this means only that the option cannot be exercised after the offer has lapsed.

An offer can be accepted only by the person or persons for whom it is intended. Therefore, no assignment—a transfer to another of any property—of an offer can be made. The prohibition is based on the concept that everyone has the privilege of choosing with whom to contract. Once an offer has ripened into a contract, however, the rights thereby created are usually assignable. For example, if Jane offers an option to Jack to purchase Whiteacre, Jack cannot accept the option and then assign it to Joe. Once Jack and Jane enter into a contract for the sale of Whiteacre, Jack can assign his contract rights to Joe.


n. a right to purchase property or require another to perform upon agreed-upon terms. An option is paid for as part of a contract, but must be "exercised" in order for the property to be purchased or the performance of the other party to be required. "Exercise" of an option normally requires notice and payment of the contract price. Thus, a potential buyer of a tract of land might pay $5,000 for the option which gives him/her a period of time to decide if he/she wishes to purchase, tying up the property for that period, and then pay $500,000 for the property. If the time to exercise the option expires then the option terminates. The amount paid for the option itself is not refundable since the funds bought the option whether exercised or not. Often an option is the right to renew a contract such as a lease, broadcasting a television series, the employment of an actor or athlete, or some other existing business relationship. A "lease-option" contract provides for a lease of property with the right to purchase the property during or upon expiration of the lease.


(Choice), noun alternate choice, alternative, choice, discretion, election, free decision, free selection, free will, freedom, freedom of choice, leave, liberty, pick, power to choose, preference, right of choice, selection
Associated concepts: election between options, exercise of option, options after default


(Contractual provision), noun acquired right, agreement, allowance, approval, authorization, consent, continuing offer, continuing offer to buy, favor, grant, license, power, prerogative, privilege, proviso, right, right to buy or sell, sanction, stipulation, term, understanding
Associated concepts: conditional option, continuing option, exercise of an option, first option, irrevocable option, oppion to buy, option to lease, option to purchase, option to renew, option to sell
See also: choice, conatus, discretion, election, franchise, latitude, preference, suffrage, volition, vote

OPTION. Choice; Election; (q.v.) where the subject is considered.

References in periodicals archive ?
"Many long-term investors sell covered calls, a conservative option strategy that generates income from stocks that you already own.
At the outset, this option would not cause the broker too much anxiety as the chances of it being declared are remote, but as the price increases, so would the potential loss.
Another trend that the authors noticed in regulatory filings was the barring of senior management or board members from participating in stock option exchange programs.
INTRINSIC VALUE OF AN OPTION: It is defined as the amount by which an option is an ITM.
1361, which states that generally call options, warrants, or similar instruments (collectively, "call options") are treated as a second class of stock if the call options are substantially certain to be exercised and have a strike price substantially below the FMV of the underlying stock on the date that the call options are issued or transferred by an eligible shareholder to a person who is not an eligible shareholder.
* journal entries for options expenses that differ from the equity management system; and
He would normally be your "pitch" man--the defender off whom the QB will decide whether to keep or pitch in the Speed Option.
A company may receive a tax deduction from an option exercise before actually realizing the related tax benefit because it has a net operating loss carryforward.
If, for example, an individual holds an option to purchase stock, then the holder controls that stock without having to pay cash to buy it.
The answer to that question depends, according to the above analysis, on whether an option granting is a hidden financial transaction that postpones the granting company's current compensation expenses to the future, or an incentive mechanism to improve the company's long-term performance.
One way for a manager to explicitly account for the timing and sequencing of risky decisions is through options thinking.
To address the need for a less costly LTC accreditation process, JCAHO launched the "Medicare/Medicaid Certification-based Long Term Care Accreditation" option in January 2003.