An option is a right to buy or sell an asset for a specified price and time.Let’s say you want to by a TV on sale at Wal-Mart. You drive there only to find out that it’s "sold out". So you go to the clerk and ask for a "rain check".
This "rain check" is a guarantee that you will get the TV for the sale price when they are back in stock. There may be an expiration date on the "rain check" for 1 month from the out of stock date.This rain check qualifies as an Call option.
You have the right to purchase the TV for the sale price up to 1 month regardless of how much the TV goes up or down in price during that period. You are the buying this call option and Wal Mart is the seller. The only difference of this rain check versus a real option is that there is NO value on this option and it is probably non-transferable.
Now, let’s use this same concept for a stock.
For instance, you want to buy Microsoft stock and it is trading at $50 a share. Instead of buying the stock, you decide to purchase a "right to buy the stock at 50" which will expire on 1/15/01. You would be willing to pay $3 for this right to buy Microsoft before 1/15/01 at $50.
On the other side of this deal, there is someone who is willing to sell you this right for you to buy Microsoft from him for 50. He wants $3 for granting you this contract.
Comparison table: Stock option VS Rain check for TV
Rain check for TV
Strike (exercise) price
Call (buy) or Put (sell)
NO VALUE (non transferrable)