1

option

play
noun op·tion \ ˈäp-shən \
Updated on: 26 Jul 2017

Definition of option

1 :an act of choosing
  • hard to make an option between such alternatives
2 a :the power or right to choose :freedom of choice
  • He has the option to cancel the deal.
b :a privilege of demanding fulfillment of a contract on any day within a specified time
c :a contract conveying a right to buy or sell designated securities, commodities, or property interest at a specified price during a stipulated period; also :the right conveyed by an option
  • The ad is for a condo to rent with an option to buy.
d :a right of an insured person to choose the form in which payments due on a policy shall be made or applied
3 :something that may be chosen: such as
a :an alternative course of action
  • didn't have many options open
b :an item that is offered in addition to or in place of standard equipment
  • A sunroof is one of the options that you can get with the car.
4 :an offensive football play in which a back (see 1back 3) may choose whether to pass or run with the ball called also option play

Examples of option in a Sentence

  1. You have the option of staying home or coming with us.

  2. He has the option to cancel the deal.

  3. We have a wide range of options available to us.

  4. Menu options at the café include soups, salads, and sandwiches.

  5. Select an option from the drop-down menu.

  6. Filing taxes online is an option for people with Internet access.

  7. I had no option but to start over.

  8. A good option is to do the work yourself.

  9. Employees will each be granted options to buy 1,000 shares of company stock.

  10. The option must be exercised within five years.

Recent Examples of option from the Web

These example sentences are selected automatically from various online news sources to reflect current usage of the word 'option.' Views expressed in the examples do not represent the opinion of Merriam-Webster or its editors. Send us feedback.

Origin and Etymology of option

French, from Latin option-, optio free choice; akin to Latin optare to choose

Synonym Discussion of option

choice, option, alternative, preference, selection, election mean the act or opportunity of choosing or the thing chosen. choice suggests the opportunity or privilege of choosing freely.
    • freedom of choice
option implies a power to choose that is specifically granted or guaranteed.
    • the option of paying now or later
alternative implies a need to choose one and reject another possibility.
    • equally attractive alternatives
preference suggests a choice guided by one's judgment or predilections.
    • a preference for cool weather
selection implies a range of choice.
    • a varied selection of furniture
election implies an end or purpose which requires exercise of judgment.
    • doing a tax return forces certain elections on you

2

option

verb

Definition of option

transitive verb
1 :to grant or take an option on
2 :to acquire the exclusive right to use (an author's work) as the basis for a motion picture
  • the studio optioned the novel for a film

Recent Examples of option from the Web

These example sentences are selected automatically from various online news sources to reflect current usage of the word 'option.' Views expressed in the examples do not represent the opinion of Merriam-Webster or its editors. Send us feedback.

Origin and Etymology of option


Financial Definition of OPTION

option

What It Is

A call option gives the holder the right, but not the obligation, to purchase 100 shares of a particular underlying stock at a specified strike price on the option's expiration date.

How It Works

Options are derivative instruments, meaning that their prices are derived from the price of another security. More specifically, options prices are derived from the price of an underlying stock. For example, let's say you purchase a call option on shares of Intel (INTC) with a strike price of $40 and an expiration date of April 16th. This option would give you the right to purchase 100 shares of Intel at a price of $40 on April 16th (the right to do this, of course, will only be valuable if Intel is trading above $40 per share at that point in time). Note that the expiration date always falls on the third Friday of the month in which the option is scheduled to expire.

Every option represents a contract between a buyer and seller. The seller (writer) has the obligation to either buy or sell stock (depending on what type of option he or she sold; either a call option or a put option) to the buyer at a specified price by a specified date. Meanwhile, the buyer of an option contract has the right, but not the obligation, to complete the transaction by a specified date. When an option expires, if it is not in the buyer's best interest to exercise the option, then he or she is not obligated to do anything. The buyer has purchased the option to carry out a certain transaction in the future, hence the name.

As a quick example of how call options make money, let's say IBM stock is currently trading at $100 per share. Now let's say an investor purchases one call option contract on IBM with a $100 strike and at a price of $2.00 per contract. Note: Because each options contract represents an interest in 100 underlying shares of stock, the actual cost of this option will be $200 (100 shares x $2.00 = $200).
Here's what will happen to the value of this call option under a variety of different scenarios:

When the option expires, IBM is trading at $105.
Remember: The call option gives the buyer the right to purchase shares of IBM at $100 per share. In this scenario, the buyer could use the option to purchase those shares at $100, then immediately sell those same shares in the open market for $105. This option is therefore called in the money. Because of this, the option will sell for $5.00 on the expiration date (because each option represents an interest in 100 underlying shares, this will amount to a total sale price of $500). Because the investor purchased this option for $200, the net profit to the buyer from this trade will be $300.

When the option expires, IBM is trading at $101.
Using the same analysis as shown above, the call option will now be worth $1 (or $100 total). Since the investor spent $200 to purchase the option in the first place, he or she will show a net loss on this trade of $1.00 (or $100 total). This option would be called at the money because the transaction is essentially a wash.

When the option expires, IBM is trading at or below $100.
If IBM ends up at or below $100 on the option's expiration date, then the contract will expire out of the money. It will now be worthless, so the option buyer will lose 100% of his or her money (in this case, the full $200 that he or she spent for the option).

Why It Matters

Investors use options for two primary reasons: to speculate and to hedge risk. All of us are familiar with the speculation side of investing. Every time you buy a stock you are essentially speculating on the direction the stock will move. You might say that you are positive that IBM is heading higher as you buy the stock, and indeed more often than not you may even be right. However, if you were absolutely positive that IBM was going to head sharply higher, then you would invest everything you had in the stock. Rational investors realize there is no "sure thing," as every investment incurs at least some risk. This risk is what the investor is compensated for when he or she purchases an asset. When you purchase call options to speculate on future stock price movements, you are limiting your downside risk, yet your upside earnings potential is unlimited.

Hedging is like buying insurance. It is protection against unforeseen events, but you hope you never have to use it. Consider why almost everyone buys homeowner's insurance. Since the odds of having one's house destroyed are relatively small, this may seem like a foolish investment. But our homes are very valuable to us and we would be devastated by their loss. Using options to hedge your portfolio essentially does the same thing. Should a stock take an unforeseen turn, holding an option opposite of your position will help to limit your losses.



OPTION Defined for English Language Learners

option

play
noun

Definition of option for English Language Learners

  • : the opportunity or ability to choose something or to choose between two or more things

  • : something that can be chosen : a choice or possibility

  • : a right to buy or sell something for a specified price during a specified period of time


OPTION Defined for Kids

option

play
noun op·tion \ ˈäp-shən \

Definition of option for Students

1 :the power or right to choose
  • Children have an option between milk or juice.
2 :something that can be chosen
  • Quitting is not an option.
3 :a right to buy or sell something at a specified price during a specified period
  • His parents took an option on the house.

Law Dictionary

1

option

play
noun op·tion \ ˈäp-shən \

legal Definition of option

1 :the power or right to choose; also :a choice made or available
2 :a privilege of demanding fulfillment of a contract on any day within a specified time
3 :a contract conveying in exchange for the payment of a premium a right to buy or sell designated securities, commodities, or interests in property at a specified price during a stipulated period; also :the right conveyed by such a contract
  • decided to exercise his option
call option
:an option to buy at a fixed price at or within a certain time — compare put option in this entry
covered option
:an option in which the optionor owns the security or commodity to be conveyed under the option — compare naked option in this entry
futures option
:an option on futures
incentive stock option \in-ˈsen-tiv-\
:a stock option granted by a corporation to its officers and employees as supplementary compensation that is subject to special tax treatment under the Internal Revenue Code
index option
:an option on a stock index
naked option
:an option in which the optionor does not own the security or commodity and will have to purchase it at market price if the optionee decides to exercise the option — compare covered option in this entry
put option
:an option to sell for a fixed price at or within a specified time
stock option
:an option giving the optionee the right to purchase a specified number of shares of stock from a corporation at a specified price at or within a specified time — see also incentive stock option in this entry
4 :a right of an insured to choose the form in which various payments due him or her on a policy shall be made or applied
dividend option
:an option allowing the owner of a participating insurance policy and especially a life insurance policy to determine how dividends are to be paid (as in cash or by being applied as payment for additional insurance)
installments-for-a-fixed-amount option
:a settlement option in which the insurer retains the policy proceeds and makes periodic payments of a fixed amount until the proceeds are exhausted called also fixed amount option
installments-for-a-fixed-period option
:a settlement option in which the policy proceeds are retained by the insurer and paid in installments over a fixed period of time called also fixed period option
interest-only option
:a settlement option in which the insurer retains the policy proceeds and makes interest payments at a guaranteed minimum rate
joint-and-last-survivorship option
:an option in which the insurer makes periodic payments to two or more persons (as a husband and wife) of the proceeds or usually cash value of a policy until the death of the last survivor
life income option
:a settlement option in which the insurer retains the policy proceeds and makes periodic payments for the beneficiary's life or for a specified number of years even after the beneficiary's death with payments to a different recipient
nonforfeiture option \ˌnän-ˈfȯr-fə-ˌchu̇r-\
:an option (as to surrender the policy for its cash value or convert the policy to one with a smaller face amount or to a term policy with a shorter period) available to a policyholder who has ceased paying premiums
settlement option
:an option to receive payments of the proceeds of a life insurance policy other than by lump sum

2

option

transitive verb

legal Definition of option

:to grant or take an option on
  • started buying or optioning riverfront land
  • —Rita Koselka


Seen and Heard

What made you want to look up option? Please tell us where you read or heard it (including the quote, if possible).

Love words? Need even more definitions?

Subscribe to America's largest dictionary and get thousands more definitions and advanced search—ad free!

WORD OF THE DAY

to curse or denounce

Get Word of the Day daily email!

Test Your Vocabulary

Merriam-Webster's New Words Quiz—Fall 2017 Edition!

  • young-plant-shoots
  • Which of the following is a new sense of the word bunny?
Spell It

Can you spell these 10 commonly misspelled words?

TAKE THE QUIZ
Citation

Test Your Knowledge - and learn some interesting things along the way.

TAKE THE QUIZ

Love words? Need even more definitions?

Subscribe to America's largest dictionary and get thousands more definitions and advanced search—ad free!