Option
Principles of Finance glossary · Time Value of Money
Definition
A contract granting the right to buy or sell an asset at a specified price.
Option in plain English
An option is a contract that gives you the RIGHT — but not the obligation — to buy or sell something at a price locked in today, to be used later if you want. Think of putting down a small deposit to reserve concert tickets at $50: if the show blows up and resale hits $200, you happily use your right to buy at $50; if nobody cares and prices fall, you just walk away and lose only the deposit. That's the magic of an option — your downside is limited to what you paid for it, while the upside stays open. In finance the "something" is usually a stock or other asset, and the locked-in price is called the strike price.
Practice Option
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