Boundary Conditions

An option is an investor's way of making a bet that the price of a stock will go up (a call option) or down (a put option).

Options investors usually set boundary conditions, meaning a maximum and minimum price for the “underlying asset” (such as a stock) for the call or put options. The investor would most likely set the maximum value as the current price of the stock. If that price is greater than the call option boundary, the investor would not exercise the option, since he or she would lose money paying the current market price.

Same deal, more or less, for put options. If the price of the stock stays above your lowest boundary, you would not exercise the option, since you're waiting for it to drop down to a given price.

Let’s say you have your eye on the stock for Desktop Throwbacks, LLC, and are willing to buy if it goes down to $25. You could sit around and wait for this to happen (sounds relaxing), but a better use of your money might be to sell a put option, setting the boundary at the current market price of $28.

If the price stays at or above $28, the option buyer would not force you to pay that amount, and the option would expire. If it does go down to $25, you get the shares at the price you wanted. Yippee.