OPTION: A financial Instrument

Options are financial instruments used in managing or hedging risks.

In today's picture, Simon takes a risk in printing complementary cards only to be told by his master that his name had been changed to Peter. Life and business is full of risks andt our goal as managers is not to avoid risks but to effectively manage them.

The value and usefulness of "options" is that they provide managers with flexibility in decision making and a means of reducing the risk associated with such decisions.

An option is a financial instrument that provides the owner the right but not the obligation to buy or sell  an asset at a predetermined value, at a given date. All the buyer of the "option" needs to do is to pay an "option price".

The way it works is that as a manager, you can identify an asset and instead of buying it, you can buy an option to buy it on a later date at an agreed price. The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the corresponding obligation to fulfill the transaction. 

So you pay a premium (an option fee) which is usually a small amount compared to the cost of the asset and if it turns out that the buying price at the call date is not favorable, you can decide not to buy the asset but if it is favorable, you can buy at the agreed price and sell off at a profit.