Options, which are financial instruments that grant the right to one party to acquire something from another party or sell something to another party at a fixed price, are widely seen in the financial world.
Options are best viewed as the rights to do something, such as buy or sell. Investors trade options on the stocks of companies in a large and active market. Companies often use options to give employees and management incentives to continue working for the company and to work harder. Many capital investment projects have implicit options to make changes to the projects. Equity can be viewed as an option in that paying off debt is like buying the assets from the creditors for the price promised, the face value of the debt.
Options have value, sometimes great value. If there is any doubt about that, ask yourself whether you would be willing to give one away. In the study of finance, we learn how to determine what an option is worth and how they should be used.
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Last updated: January 9, 2011