Over the winter break I was able to catch up on a lot of podcasts. I also began listening to the Marginal Revolution podcast (which is phenomenal). I especially enjoyed the final episode of season 1 about options and how many transactions can be characterized as giving someone an option. Here, the term option echoes a financial option. You pay today for the ability to do something in the future. In financial markets, you can purchase the right to buy or sell at a particular price in the future.

But lots of things count as options. Staying in the financial context, purchasing a stock gives you the option to sell that stock at the future spot price. So, in this way, something can be characterized as an option even though we are not accustomed to describing as such explicitly. More mundane transactions can also be interpreted as options. Assume that you buy a can opener. You are buying the option to have that tool on hand in the future and to open some shelf-stable food. You can choose to exercise the option simply by opening your kitchen drawer.

But financial options often include the possibility of losing money. It may be that your grocery purchases never include canned items and that you never have occasion to use your can opener. Maybe that’s a bad investment. You sunk your money into something that you never used. Except… You did in fact have the option to use the can opener. Maybe you had peace of mind that you were well prepared just in case a guest arrived with a can of something. Buying a can opener is like buying an option.

Returning to the realm of finance, let’s discuss buying on margin. Buying an asset on margin is when you borrow from your broker in order to purchase a financial asset. It’s not entirely free money. They have rules about the amount you can borrow and, of course, you must pay back the loan with interest.

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