What Is an Option:

The idea of options is certainly not new. Ancient Romans, Grecians, and Phoenicians traded options against outgoing cargoes from their local seaports. When used in relation to financial instruments, options are generally defined as a "contract between two parties in which one party has the right but not the obligation to do something, usually to buy or sell some underlying asset". Having rights without obligations has financial value, so option holders must purchase these rights, making them assets. This asset derives their value from some other asset, so they are called derivative assets. Call options are contracts giving the option holder the right to buy something, while put options, conversely entitle the holder to sell something. Payment for call and put options, takes the form of a flat, up-front sum called a premium. Options can also be associated with bonds (i.e. convertible bonds and callable bonds), where payment occurs in installments over the entire life of the bond, but this paper is only concerned with traditional put and call options.