ABSTRACT
An option is a right but not an obligation to do something. A European call option on a stock in the financial market gives the holder the right to buy a share of stock (exercise the option) at a predetermined price (strike price) at a predetermined time (time of expiry). The holder of such an option is under no obligation to buy the share of stock or do anything for that matter. But, if the price of the stock is higher than the strike price when the option can be exercised, the holder of the option most likely will exercise it by paying the strike price for a share of the stock. In effect, the holder of the option can pocket the difference between the stock price and the strike price. But, if the stock price is lower than the strike price, the holder of the option will not exercise it and will let the option expire worthless. An option is valuable to its owner as the worst that could happen is that the option expires worthless. Since the price of stock does not have a technical upper bound, this difference between the stock price and strike price also does not have an upper bound (although the price of the stock is unlikely to exceed certain limits based on the characteristics of the industry and overall economy).
