Option use through history has been widespread and varied. Options have been used for many diverse conditions including:
1. Real Estate
Call options are used to bring together large parcels of land from separate owners. An example of this is if a developer wants to buy several plots of land together, but they are owned separately. He pays the privilege that he is not obligated to buy these plots if he can’t buy them all.
2. Lines of Credit
Options gives the potential borrower the right- but not the obligation- to borrow within a specified time frame.
3. Film and Theatre
The use of an option gives the producer the right- but not the obligation- to dramatize a certain book or script.
4. Bond Contracts
Allows many choices (or embedded options), such as converting the bonds into common stock at the buyer’s option. The bonds may also be bought back (called) at specified prices at the issuer’s option.
Using options in mortgages allows the borrower the choice of repaying the loan early (similar to a callable bond option).
These are some of the major ways that the use of options has become a part of many sectors of business throughout history.
Back to Explain Option Trading