Abandoned Option

An abandoned option is an option which is not exercised ahead of its expiration date.

Options give their bearers the right to buy or sell assets or securities at a certain point in the future or when certain conditions are met. However, bearers are not obligated to exercise options and follow through on transactions if they choose not to.

When option bearers do not exercise their options on the due date or when conditions are met (because conditions are unfavorable, for example), the options expire and become redundant. These unused options are abandoned options.

Investors pay premiums when they buy options. When options which are unused and become abandoned, the money paid in commission is lost. However, the lost commission is typically far less than the amount which investors would lose if they purchased assets ahead of rate changes.

Example: An investor believes that the price of gold is going to climb to 1270 Swiss francs per fine ounce from its current price of 1250 francs per ounce by the fourth quarter. However, there is no guarantee that this will indeed happen. Rather than buying 10,000 ounces of gold and then hoping its value will increase so they can sell it at a profit, the investor buys an option which gives them the right to buy 10,000 ounces of gold for 1255 francs per fine ounce at the start of the fourth quarter. They pay a 2000-franc premium for this option.

If, rather than climbing, the price of gold sinks to 1246 francs per ounce by the fourth quarter, the investor could simply choose not to exercise their option to buy the gold. The option becomes an abandoned option, and the 2000 francs which they spent on the premium turns out to be a bad investment. However, the money spent on the premium is far less than the capital loss (4 francs per ounce or 40,000 francs) which they would have made had they bought the gold.

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