Option (finance)
A contract giving the right, not obligation, to trade an asset.
An option is a financial contract that conveys to its holder the right, but not the obligation, to buy or sell a specific quantity of an underlying asset or instrument at a specified strike price on or before a specified date, depending on the style of the option. Options are typically acquired by purchase, as a form of compensation, or as part of a complex financial transaction, and they are a form of asset or contingent liability with valuation depending on factors such as underlying asset price, time until expiration, market volatility, the risk-free rate of interest, and the strike price.
- field
- Finance
- known_for
- Contract granting right to buy or sell an underlying asset at a specified price on or before a specified date
- types
- Call (right to buy) and Put (right to sell)
- trading_forms
- Exchange-traded (standardized) and Over-the-counter (customized)
- key_historical_figure
- Thales of Miletus (first reputed option buyer)
Lore & Background
Contracts similar to options have been used since ancient times. The first reputed option buyer was the ancient Greek mathematician and philosopher Thales of Miletus, who acquired the right to use olive presses the following spring after a prediction of a larger-than-usual harvest, then exercised his options and rented the presses at a higher price. In the 1688 book Confusion of Confusions, Joseph de La Vega described the trading of 'opsies' on the Amsterdam stock exchange, noting that 'there will be only limited risks to you, while the gain may surpass all your imaginings and hopes.' In London, puts and 'refusals' (calls) became well-known trading instruments in the 1690s during the reign of William and Mary.
Reader's Guide
Options are part of a larger class of financial instruments known as derivative products. They may be traded between private parties in over-the-counter transactions or exchange-traded in live, public markets in the form of standardized contracts. The Chicago Board Options Exchange was established in 1973, setting up a regime using standardized forms and terms and trade through a guaranteed clearing house, after which trading activity and academic interest increased. Options contracts have been known for decades, and today many are created in standardized form and traded through clearing houses on regulated options exchanges, while others are written as bilateral, customized contracts. The market price of an option may vary depending on factors such as a significant option holder needing to sell due to the expiration date approaching, or a buyer trying to amass a large option holding. Ownership of an option does not generally entitle the holder to rights associated with the underlying asset, such as voting rights or dividends.
Did You Know?
- The first reputed option buyer was the ancient Greek mathematician and philosopher Thales of Miletus.
- In London, puts and 'refusals' (calls) became well-known trading instruments in the 1690s during the reign of William and Mary.
- The Chicago Board Options Exchange was established in 1973, using standardized forms and a guaranteed clearing house.
- Options are part of a larger class of financial instruments known as derivative products.
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