Definition of option
1 : an act of choosing hard to make an option between such alternatives
2a : 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 timec : 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 asa : an alternative course of action didn't have many options openb : 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
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Examples of option in a Sentence
You have the option of staying home or coming with us.
He has the option to cancel the deal.
We have a wide range of options available to us.
Menu options at the café include soups, salads, and sandwiches.
Select an option from the drop-down menu.
Filing taxes online is an option for people with Internet access.
I had no option but to start over.
A good option is to do the work yourself.
Employees will each be granted options to buy 1,000 shares of company stock.
The option must be exercised within five years.
Recent Examples of option from the Web
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A febrile mood in the country, and the power vacuum in Downing Street, mean that all options are back on the table.
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The 80-year-old McCain, R-Ariz., is reviewing treatment options with his family.
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In addition to the food, there will be about 60 beers on tap, as well as nonalcoholic options such as lemonade, water, and Bai drinks.
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As for slowing Bsal's spread, experts met in January in Zurich, Switzerland, to evaluate the options.
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Those same courts processed 22,231 evictions in 2016, pulling people from their homes and plunging them into a rental market with few options.
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The Marlins’ potential options beyond that include lefty rookie Chris O’Grady, who won his first career start July 8th in San Francisco, and took Jeff Locke’s spot in the rotation.
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But until the cadet program, the county did not have a law enforcement option, Gahler said.
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But Washington has decided that pressuring Chinese companies is essentially the only option left, short of war on the Korean Peninsula.
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
Other Business Terms
option
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
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Colorado optioned Hanigan to the minor-leagues on Thursday to make room for Murphy.
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
see 1option
Other Economics Terms
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
playDefinition of option for English Language Learners
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: the opportunity or ability to choose something or to choose between two or more things
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: something that can be chosen : a choice or possibility
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: a right to buy or sell something for a specified price during a specified period of time
OPTION Defined for Kids
option
playDefinition 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
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
option
Legal Definition of option
: to grant or take an option on started buying or optioning riverfront land — Rita Koselka
Learn More about option
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Thesaurus: All synonyms and antonyms for option Spanish Central: Translation of option Nglish: Translation of option for Spanish speakers Britannica English: Translation of option for Arabic speakers Britannica.com: Encyclopedia article about option
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