Business Glossary

1. ability or right to choose a certain alternative.
2. ability or right to choose a certain alternative.

A put option on a security (such as stock, commodity, or stock index) is an option to sell 100 shares of the underlying security at a specified price for a given period of time, for which the option buyer pays the seller (writer) a price, termed a premium. A call is the opposite of a put and allows the owner the right to buy 100 shares of the underlying security from the option writer at a specified price for a given period of time.

An Employee Stock Option is the option granted to key employees to buy company stock at a below-market price.

option contracts that are variations on simple puts and calls or are different products with optionality built into them. Exotic options are available in various asset classes on which options are available, but are mostly found in the foreign exchange market. A common example is the barrier option, which itself comes in various forms such as knock-in options and knock-out options (and reversed versions of both) that can be either single-barrier options or double-barrier options. What those terms refer to and what barrier options have in common are one or two trigger prices that, if touched, will cause an option with predetermined characteristics to be created (knock-in option) or will cause an existing option to cease to exist (knock-out option). A double-barrier option has barriers on either side of the exercise price (i.e., one trigger price is higher than the strike price and the other is lower), whereas a single-barrier option has one trigger price that may be higher or lower than the strike price. Barrier options, because they risk either not being knocked in, or being knocked out, are cheaper than ordinary puts and calls, and a double knockout option is cheaper than a single knockout option.

Other examples of exotic options: basket options, which give the owner the right to receive two or more designated foreign currencies in exchange for a base currency, either at a prearranged rate of exchange or at the prevailing spot market rate; compound options, which are options on options, whereby the holder has the right to purchase another option at a pre-set date, at a pre-set option premium (a put on a call or a call on a put or a put on a put or a call on a call), and are used by corporations to hedge the foreign exchange risk of an uncertain acquisition or by speculators to bet on the volatility of volatility; Bermuda options, which combine the attributes of an american-style option and a european-style exercise; all-ornothing options that pay out a set amount if the underlying asset price is above or below the exercise price at the time of expiration; best-of-two options that pay off based on the independent performances of two different securities or indexes, or better-of-two options that pay off on the better performing of two underlying assets or indexes; and others.

Bonds: bondholder's right to redeem a bond before maturity. See also put bond.
Options: contract that grants the right to sell at a specified price a specific number of shares by a certain date. The put option buyer gains this right in return for payment of an option premium. The put option seller grants this right in return for receiving this premium. For instance, a buyer of an XYZ May 70 put has the right to sell 100 shares of XYZ at $70 to the put seller at any time until the contract expires in May. A put option buyer hopes the stock will drop in price, while the put option seller (called a writer) hopes the stock will remain stable, rise, or drop by an amount less than his or her profit on the premium.

Bonds: bondholder's right to redeem a bond before maturity. See also put bond.
Options: contract that grants the right to sell at a specified price a specific number of shares by a certain date. The put option buyer gains this right in return for payment of an option premium. The put option seller grants this right in return for receiving this premium. For instance, a buyer of an XYZ May 70 put has the right to sell 100 shares of XYZ at $70 to the put seller at any time until the contract expires in May. A put option buyer hopes the stock will drop in price, while the put option seller (called a writer) hopes the stock will remain stable, rise, or drop by an amount less than his or her profit on the premium.

clauses in a loan that give the lender the right to accelerate the debt upon the occurrence of a specific event or date. See acceleration clause.

Example: Abel, the mortgage lender, notices that Baker, the homeowner, has begun to demolish the property. Call provisions in the loan allow Abel to claim that the full debt is now due.