Definition
The right (but not the obligation) to buy or sell a certain asset at specific moments in time at a predetermined price
Introduction
An option is a financial instrument that gives its holder the right to buy or sell an underlying asset at a pre-agreed price at specific moments in time (Hull 2011). The first feature of an option contract is that it gives the holder the right to do something, but not the obligation (Bachelier 1900). If an option entitles to buy an asset, the option is referred to as a call option, while a put option is the right to sell an asset (Brennan and Schwartz 1977). The pre-agreed price at which the holder can buy or sell the asset is the strike price or the exercise price. The time to maturity is the time period which indicates when the holder can exercise the option. When an option is exercised during the entire period, it is commonly referred to as an American option, while a European option contract can be exercised only at the predetermined...
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References
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Cassimon, D., Engelen, PJ. (2018). Option. In: Marciano, A., Ramello, G. (eds) Encyclopedia of Law and Economics. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-7883-6_355-1
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DOI: https://doi.org/10.1007/978-1-4614-7883-6_355-1
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