An option is the right to select a particular action among choices. In business the term most often refers to “option contracts” to buy or sell stock, called STOCK OPTIONS. Options are also referred to as derivative or contingent claims, because the option instrument is derived from or contingent on the value of the asset with which they are associated. Typical options are “put” or “call” CONTRACTs. A put is the right to sell a fixed amount of the underlying asset at a fixed price for a set period of time. A call is the right to buy a certain of “fixed” amount of an underlying asset at a fixed price for a set period of time. An option contract’s seller has the obligation to buy (in the case of a put) or sell (in the case of a call) if the purchaser decides to exercise the option. The buyer gains the right to exercise the option, while the seller gets the payment for the option rights. The payment for the option is referred to as the option “premium.” The fixed price at which the purchase or sale may be executed is called the “strike price.” Whether an option has any value as its expiration date approaches depends on whether it is “in the money” or “out of the money.” “At the money” is when the strike price of the option equals the market price of the stock. An option is in the money if the current market price is above the strike price. Logically the owner of a call option would want to exercise his option to buy the stock from the calloption seller, if he could then turn around and sell the shares on the open market for more than he paid for them. For example, if ABC stock is selling for $26 per share and an option investor has a call option to purchase 100 shares (each option is typically for 100 shares) for $25 per share, she will buy the shares at $25 and sell at $26, earning $100 fewer commissions. If, however, the market price on the last day of the option contract is $24 per share, the holder of the call option will not exercise her call option because she could purchase the stock at a lower price on the open market. One conservative INVESTMENT strategy used by investors is called “writing covered calls.” In this strategy an investor sells call options against shares of stock owned. The investor receives the option premium, and if the price of the stock remains stable or declines, he will probably not have his shares called by the option buyer. When the option expires, the investor can write or sell new options against his shares. However, should the price of the stock rise, he will have to deliver the stock to the buyer of the option or purchase the option back at a higher price reflecting the rise in the value of the stock (the underlying asset). Very few options are actually delivered. Instead, near the expiration date, an opposite transaction (purchase of a call for someone who sold a call, or sale of a put for someone who bought puts) takes place, with the investor earning a PROFIT or loss by the difference in the value of the option. A risky but potentially profitable strategy is to sell call options without owning the stock against which the option is being sold. This is called “going naked,” and like the term suggests, it exposes the seller to significant RISK but also the potential for profit without investment CAPITAL. Professional options investors also engage in ARBITRAGE, the simultaneous buying and selling of options in different markets when there are small price differences. Individual investors rarely engage in arbitrage because the TRANSACTION COSTS are too high, but with market LEVERAGE, market professionals sometimes find opportunities for arbitrage. In recent years the term financial engineering has been used to describe complex, innovative FINANCIAL INSTRUMENTS and strategies utilizing options and other financial leverage investments. In the late 1990s, Long Term Capital Management (LTCM) was a global leader in financial engineering, using mathematical models developed by Nobel Prize-winning economists Myron Scholes and Robert Merton to buy and sell options and other financial derivatives. At their peak, LTCM had capital of $4.8 billion, a portfolio of $200 billion, and derivatives with a nominal value of $1,250 billion. In less than a year, though, the company was bankrupted when it bet that short-term and long-term rates would converge, but instead the spread between rates expanded. Fearing a collapse in the global securities market, the president of the New York Federal Reserve Bank orchestrated a $3.5 billion bailout of the company. Most stock brokerage firms offer options trading, which is guaranteed and cleared through the Option Clearing Corporation (OCC). The Chicago Board of Options Exchange (CBOE) is one of the major exchanges providing options trading. Options for other ASSETS can also be bought or sold. Commercial real-estate developers often purchase an option to buy a piece of property contingent on receiving development approval or finding financing to make the purchase. Companies frequently offer employees and primarily executives options to purchase company stock. Options are also available on U.S. TREASURY SECURITIES, STOCK MARKET indexes, precious metals, and a variety of other assets. As option trading has expanded into commodities and other assets beyond stocks, regional stock exchanges and the major commodity FUTURES exchanges compete to provide markets for these new securities.