Define: Option

UK Accounting Glossary

Definition: Option


Quick Summary of Option


Buying the rights to purchase an asset for a certain period of time. For example, a business may option an asset for 6 months for 10% of the sale cost. During this time they do not own the asset; however, the company that does own it is not allowed to sell it during this period.



What is the dictionary definition of Option?

Dictionary Definition


Options are financial instruments that are derivatives or based on underlying securities such as stocks.

  1. One of the choices which can be made.
  2. The freedom or right to choose.
  3. finance, legal A contract giving the holder the right to buy or sell an asset at a set strike price; can apply to financial market transactions, or to ordinary transactions for tangible assets such as a residence or automobile.

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Full Definition of Option


Buying the rights to purchase an asset for a certain period.

For example, a business may option an asset for 6 months for 10% of the sale cost.

During this time they do not own the asset; however, the company that does own it is not allowed to sell it during this period.

An option is a contract between a buyer and a writer (seller) of an underlying asset (such as a stock) where the buyer retains the right, but not the obligation, to buy or sell the underlying asset from/to the writer, at a given strike price, either on or before a predetermined expiration date. The buyer of an option pays the writer a premium to offset the risk the writer undertakes.

There are two major classes of option: a call option and a put option. A call option gives the buyer the right to buy the underlying asset from the writer, while a put option gives the buyer the right to sell the underlying asset to the writer. There are three major option styles: the American-style option, the European-style option, and the capped option. The American-style option, the most common style of option, allows the buyer to exercise the option at any time up until the expiration date. The European-style option is similar to the American-style option, however, the option cannot be exercised anytime before the expiration date, but just during a short period just before the expiration date. The capped option is the same as the European-style option except the option is automatically exercised when a cap strike price is reached (a positive cap for a call option, a negative cap for a put option). Other types of options include long term options (e.g. LEAPS) and exotic options (e.g. Bermuda option, lookback option, etc.).


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Option. PayrollHeaven.com. Payroll & Accounting Heaven Ltd. https://payrollheaven.com/define/option/ (accessed: February 28, 2020).
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Option. PayrollHeaven.com. Retrieved February 28, 2020, from PayrollHeaven.com website: https://payrollheaven.com/define/option/

Definition Sources


Definitions for Option are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • BusinessDictionary.com
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 28th December 2018.