Option

In shoot 'em up games, small sprites that either follow your ship's actions, or stay in a fixed position relative to your ship, equipped with a similar weapon, and fire at the same time. This allows you to do dammage over a wider area, or (if the game permits this) you can arrange the options in a tight cluster by describing a circle with your ship, which concentrates the firepower of the ship and options on a single target.

They're called lots of things in different games (eg, bits in R-Type, sprites in Super Aleste, etc), but to make life easier for reviewers, there's a convention of calling them 'options', since that's what they were named in Gradius, the game that made them an obligatory feature in shmups.

See also: droid, power-up.

There is an option key on the Macintosh keyboard. Much like the multiple shifting keys of ages long past (such as the super, hyper, and front keys on the space-cadet keyboard), the option key provides access to extra characters not available on the usual keyboard.

If you are using a font that supports the full Macintosh character set, you can use key combinations with this key to generate accented letters, other non-English letters (such as the German sharp-S, or the oe and ae ligatures), and a small range of other symbols: smart quotes and European quotes, dagger and double dagger signs, and a few mathematical symbols.

Under Mac OS X, the range of typable characters is greatly expanded through the Extended Roman and Unicode input modes.

In ML, the sum type defined as:

datatype 'a option = SOME of 'a | NONE

where 'a (pronounced "alpha") is a polymorphic type (i.e., it can be any type we want as long as we're consistent). The option is an extremely powerful concept in that it allows us to define partial functions. That is, if the function is defined on the particular input it gets, it returns SOME of the value; if it is not defined on the input it gets, it returns NONE. A good example is a table lookup function:

lookup : (int * string) list -> int -> string option

That is, we pass it a list of int, string pairs, and an int. If the int is in the list, it returns the associated string (well, really SOME (s)) and if not, it returns NONE.

This is particularly important when we're handling a value returned by a partial function. By the very nature of sum types, we can't do anything with the option itself besides case on whether it's a SOME or a NONE. Thus, we are forced to handle the case where the element is not found in the list, or malloc can't give us the memory we asked for.

In C, for example, instead of returning NONE, we just return a special value that indicates that we shouldn't use the value we got and that we need some special error handling. Of course, it is still a value of the type we were expecting, so there's nothing forcing us to handle that special case. This is what gets us into trouble most of the time -- trying to dereference a NULL pointer, for example. If malloc just returned NONE instead of NULL and SOME(p) instead of just the pointer, we would have no choice but to case on NONE or SOME and handle each appropriately, since that's literally all we can do with an option, or any sum type, for that matter.

This distinction (or lack thereof) gets us into trouble in the real world, too. People vie to get the vanity plate that says "NONE", since an officer taking down their plate number would write "NONE", when they really mean SOME("NONE") (of type string option), not NONE, as they're likely to confuse it to mean later.

This writeup is on options in finance. In a nutshell, an option is the right to buy or sell an asset, often shares. This can be found with a quick Internet search; However, a lot more can be said about options. I'll warn right away that this is in no way an exhaustive description of options; rather, I'll try to give an overview about what currently the most important things about options are from the point of view of an interested layperson. Even though I can't be exhaustive, I do want to be a bit thorough, so I'll give a rather precise explanation of what an option is first.

An option is a contract. This can be a direct contract between two parties; this is called an Over the counter option, and exposes you to the risk that your counterparty can't make his obligations. It can also be settled using the exchange; in this case, the counterparty doesn't matter that much, and the option can be traded. This is a pretty important one: an option is not an asset in the same way a share is or a barrel of crude oil is. It's a contract. It doesn't give you voting rights or dividend or whatever. Normally, options you buy or sell are transferred via the exchange.

Historically, an option is either the right, but not the obligation, to buy or the right to sell (one option typically isn't the right to either sell or buy!) an underlying asset at a fixed price, called the strike, within a certain timeframe or at a certain time. This is the classic definition of an option, and nowadays a bit inadequate. We can make a few remarks about this:

• This buying and selling doesn't necessarily happen. Many options are settled in cash, i.e. the profit you would have made if you would have bought the asset at the strike and sold it at the price at the time the option is exercised (the settlement price, provided this amount is positive. If it is not positive, the payout is 0-never lower! If the buying or selling does happen, it is called physical delivery. Said delivery might be several tonnes of pork bellies, so it's worthwhile to check the contract for this. Speaking about contract: one contract is an option on a certain amount of assets. For shares, this amount is usually more than one share; 100 is typical. Of course, you can buy more options to get more assets, but never less than this contract size.
• The underlying isn't necessarily an asset. It might be a future ON the asset, an index, or even an option! This asset is usually rather specific. As an example, some companies list two types of shares. You can't deliver one share if the option calls for the other. This may seem like a no-brainer, but in practice, people might hedge the options with a very similar but different asset, leading to basis risk.
• A buying right is called a call. A selling right is called a put.
• In some cases, the strike isn't fixed.
• One big difference between options is the exercise style. The main types for investors are European style, which means that the option only can be exercised at the last day the contract lasts (the expiry), and the American style meaning the options can be exercised daily until expiry. Slightly less common are Asian options, which are not settled on the price at expiry, but rather at the average price between a certain time and expiry, and the Bermudan option, which can be exercised at certain dates until expiry. It is worth noting that many European options have a so-called Asian tail: this means the option isn't settled at one price, but rather at an average over a short time before expiry - half an hour is typical. This doesn't significantly impact pricing, but makes market manipulation more difficult. For a real Asian option, this averaging is over a much longer period. It's also important to note that these name have nothing to do with location, Asian, European and American options are all traded everywhere. As a rule of thumb, options that are settled physically are American, and cash-settled options are European, but there are many exceptions.

Options are also valuable. You have the right, but not the obligation, so if exercise would cost money, you simply don't do it. Pricing options is a very interesting field that is part art, part science and part goat entrails. For European options, a "solution" called the Black-Scholes equation exists, but that uses assumptions that are wrong and inputs that are unknown. It's used in option pricing, but with a lot of quasi-mathematical modeling and gut feeling attached to it. In general, an option is worth what the market is willing to pay for it. Arbitraging options is a rather complex specialty of a few hedge funds and market makers.

An option contract has two sides: buying and selling. If you buy the option, you pay money and get the right, but not the obligation. If you sell the option, you receive the money and you have no right, but you do have the obligation. Hence, options are a zero-sum game. Anything the buyer makes, the seller loses, and vice-versa.

So, now we have, at least in theory, a fairly complete picture of what options can do. Let's look at some examples to clarify matters a bit more

Imagine we think that Exxon (XOM) will go up. It is currently trading 73.68, but we think it will go up- in fact, we think it will go up quite a bit. Hence, we buy the Jan 09 80 Call (this is the proper slang - casually mention it to your broker and sound like a pro). Jan 09 means that the option will expire in January 2009, and normally on the third Friday, at the close, which is at 16.00. Our call gives us the right to buy 100 shares of Exxon for $80 at, or before, January 16, 2008. I pay $4.35 * 100 for this right. Hence, we will make a profit if Exxon is above $84.35 - the strike of $80 plus the $ 4.35 paid for the call. This profit is multiplied by 100, because one option contract is for 100 shares. Note that option prices are always quoted per share, not per contract! If Exxon is above $80, but below $ 4.35, we do make a bit of profit, as we can buy the shares for $80 and sell them for more, but this is not enough to recoup the price of the option, so we make a net loss.

Now, imagine, Exxon doesn't go up, but it goes down, quite a bit, to 55. If I would have bought shares, I would have lost nearly $20, but with my option, my loss is capped at $4.35. In this sense, options can be safer than shares, provided they are used responsibly.

Speculating on a move up or down is something we could have done anyway. by buying shares. However, with options, we can also speculate on movement. We can do this by buying a straddle. This is a combination of a call and a put with the same strike. In this case, I can buy the Jan 09 75 call for $ 6.60 and the Jan 09 75 put for $ 7.90. This will set us back $14.50 - times 100 because the contract size is 100. If Exxon closes above $75, we can exercise the call and pocket the difference. If Exxon closes below $75, we can exercise the put and pocket the difference. Hence, we make a net profit if Exxon closes below $ 60.50 or above $89.50.

Options are hence quite a bit more versatile and powerful than stocks. An apt metaphor might be the difference between an old, dull knife and a very sharp knife. If you know what you are doing, working with sharp knives is actually safer, as you are a lot less likely to cut yourself. However, a total klutz will cut himself anyway, and in that case, a sharp knife can cause a lot more damage. Hence, be careful with options, and don't take this as investment advice.

In this writeup, we have merely scratched the surface of what options are and how we can use them for trading. Many good books have been written on this subject; I personally prefer John Hull's Options, Futures, and Other Derivatives, which is a bit mathy but quite thorough. I've also heard good things about Sheldon Natenberg's Option Volatility & Pricing: Advanced Trading Strategies and Techniques.

Sources:

• I got the option prices from Yahoo Finance, http://finance.yahoo.com/q/op?s=XOM, at November 16 2008

Op"tion (?), n. [L. optio; akin to optare to choose, wish, optimus best, and perh. to E. apt: cf. F. option.]

1.

The power of choosing; the right of choice or election; an alternative.

There is an option left to the United States of America, whether they will be respectable and prosperous, or contemptible and miserable, as a nation. Washington.

2.

The exercise of the power of choice; choice.

Transplantation must proceed from the option of the people, else it sounds like an exile. Bacon.

3.

A wishing; a wish.

[Obs.]

Bp. Hall.

4. Ch. of Eng.

A right formerly belonging to an archbishop to select any one dignity or benefice in the gift of a suffragan bishop consecrated or confirmed by him, for bestowal by himself when next vacant; -- annulled by Parliament in 1845.

5. Stock Exchange

A stipulated privilege, given to a party in a time contract, of demanding its fulfillment on any day within a specified limit.

Buyer's option, an option allowed to one who contracts to buy stocks at a certain future date and at a certain price, to demand the delivery of the stock (giving one day's notice) at any previous time at the market price. -- Seller's option, an option allowed to one who contracts to deliver stock art a certain price on a certain future date, to deliver it (giving one day's notice) at any previous time at the market price. Such options are privileges for which a consideration is paid. -- Local option. See under Local.

Syn. -- Choice; preference; selection. -- Option, Choice. Choice is an act of choosing; option often means liberty to choose, and implies freedom from constraint in the act of choosing.

 

© Webster 1913.