Principles of Managerial Finance, 15th Edition

17.5 Options

1. LG6

An option is an instrument that provides its holder with an opportunity to purchase or sell a specified asset at a stated price on or before a set expiration date. Options are probably the most popular type of derivative security. The development of organized options exchanges has created markets in which to trade these securities. Three basic forms of options are rights, warrants, and calls and puts. Rights are discussed in Chapter 7, and warrants were described in the preceding section.

Calls and Puts

The two most common types of options are calls and puts. A call option is an option to purchase a specified number of shares of a stock (typically 100) on or before a specified future date at a stated price. The stock that ...