option

Definitions (5)
Related Terms
1. Contract to keep an offer open for a fixed period during which the offeror cannot withdraw the offer.
2. Formal contract between a seller (the optioner) and a buyer (the optionee) the right (but not the obligation) to buy-and-sell (or to buy-or-sell) a specific property or a fixed-quantity of a commodity, currency, or security, at a fixed price (called exercise price) on or up to a fixed date (called expiration date). Optionee pays down only a fraction (called premium or option money) of the full value of the contract, thus obtaining an investment leverage. An option to buy (called call option) is purchased when prices are expected to rise, an option to sell (called put option) when prices are expected to fall, and an option to buy-or-sell (called double option) when prices may go either way.
The most popular types of options are named American option (exercisable any day up to the expiration date) and European option (exercisable only on the expiration date). Any option that is not exercised is automatically cancelled and the optionee loses the premium. In practice, only a few options are exercised and most are bought from or sold to other optioners or optionees before the expiration date. Since options are legally binding contracts, they have intrinsic value and are freely traded on the futures exchanges. Futures contracts, in contrast, cannot lapse and their holder have to sell them before their expiration date or take delivery of the underlying item. Called also option contract.
3. Employee stock option where key employees are given a chance to buy the firm's stock at a special price.
4. Agreement through which a firm takes a tentative stake in a project and, while it has the right to continue its participation, does not make any commitment.
5. Alternative term for an alternative.

Use 'option' in a Sentence

You must always leave yourself an option as a way out if things do not go well and you need to change your course.
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I decided to take the third option my parents offered me and take my little brother trick or treating because I didn't not wanna do my homework.
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Sometimes you may need to sign an option if you want to take a job but aren't quite ready to commit fully.
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Notable Quotable

How to Structure Options
"Options should be structured carefully. Absent special factors, they should have built into them a retained-earnings or carrying cost factor. Equally important, they should be priced realistically. When managers are faced with offers for their companies, they unfailingly point out how unrealistic market prices can be as an index of real value. But why, then, should these same depressed prices be the valuations at which managers sell portions of their businesses to themselves? Except in highly unusual cases, owners are not well served by the sale of part of their business at a bargain price -- whether the sale is to outsiders or to insiders. The obvious conclusion: options should be priced at true business value."
- Warren Buffett
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