CHAPTER 2
Greek Philosophy
My wife, Kathleen, is not an options trader. Au contraire. However, she,
like just about everyone, uses them from time to time—though without
really thinking about it. She was on eBay the other day bidding on a pair of
shoes. The bid was $45 with three days left to go. She was concerned about
the price rising too much and missing the chance to buy them at what she
thought was a good price. She noticed, though, that someone else was
selling the same shoes with a buy-it-now price of $49—a good-enough
price in her opinion. Kathleen was effectively afforded a call option. She
had the opportunity to buy the shoes at (the strike price of) $49, a right she
could exercise until the offer expired.
The biggest difference between the option in the eBay scenario and the
sort of options discussed in this book is transferability. Actual options are
tradable—they can be bought and sold. And it is the contract itself that has
value—there is one more iteration of pricing.
For example, imagine the $49 opportunity was a coupon or certificate that
guaranteed the price of $49, which could be passed along from one person
to another. And there was the chance that the $49-price guarantee could
represent a discount on the price paid for the shoes—maybe a big discount
—should the price of the shoes rise in the eBay auction. The certificate
guaranteeing the $49 would have value. Anyone planning to buy the shoes
would want the safety of knowing they were guaranteed not to pay more
than $49 for the shoes. In fact, some people would even consider paying to
buy the certificate itself if they thought the price of the shoes might rise
significantly.