Embedded Option

Drop a penny off a 50-story building and watch it hit someone on the street below. Smack! Right in the head. Now that penny is embedded in their scalp. Stuck in tight, such that even the doctor can't extract it...despite the aggressive use of forceps.

That's an embedded penny. Now, to an embedded option. It's stuck into a security, usually a bond. The option and the bond are inseparable...you can't sell the option separate from the bond. You can't pull them apart, even with forceps.

The embedded option gives either the holder or the issuer the ability to take some action in the future.
For example, a callable bond has an embedded option that allows the bond issuer to repurchase the bond under certain conditions.

You run a business that produces fake snow makers for use in indoor ski slopes. You get a big order in Dubai, but you need to borrow some money to get the project going while you wait for payment.

You issue a set of 2-year bonds with an embedded option to call the bonds back if you get paid early. The Dubai ski slope company cuts you a check after 6 months and you exercise your option, calling in the bonds a year-and-a-half before their expiration date.