I typically motivate options by using an example of sport ticket reservations which have been around for nearly a decade. Earlier this week, I came across Team Tix (click here) , a new incarnation of this mechanism. Team Tix charges a reservation fee (call option price or premium) for the right to tickets at face value (exercise price) if your favorite team enters a high profile event (Super bowl, National Championship etc). If your team makes it to the game, the “option” is automatically exercised and you get the number of tickets you “reserved” at face value. If your team does not, the option effectively expires worthless. You can reserve as many tickets as you wish, the fee differs depending on where you decide to sit (400 level, end zone). Of course the fee changes as team rankings change week over week, and there are websites (secondary markets) where people can sell their reservations for a higher price than they paid for them. Some even buy more than they will use, hoping to see the game for free (or cheaper) by reselling an appropriate number of tickets. Team Tix is not the only one “selling” these options. It creates software and sells it to brokers who are the effective market makers in this business.
What I found amusing was that a business that started as a way to get around the sleaziness of last minute pre-game resellers found itself prey to the same kind of situation. Click here for that story.