optionality

A measure of one’s choices available in a given situation. I learned of this concept from Nassim Taleb’s book Antifragile. Much of Taleb’s work (especially Black Swan) focuses on the increasing unpredictability of the world (as global systems grow in complexity). When predicting the future grows increasingly difficult, maximizing one’s options in responding to the unpredictable becomes an important strategy to surviving and thriving.

If you have optionality, you don’t have much need for what is commonly called intelligence, knowledge, insight, skills, and these complicated things that take place in our brain cells. For you don’t have to be right that often. (Taleb in Antifragile)

In Finance

In finance, optionality can be quantified in dollars through the purchase of financial instruments called “put options,” which are contracts allowing, but not obligating, the holder to sell stock at a fixed price until a future date. In this way, put options provide a way of betting against a publicly-traded company: if I think XYZ Corp’s current share price of $10 is going to go down due to some future misfortune I can purchase the option to sell a certain amount of stock at $10 a month from now. If it goes down to $5/share, I can exercise that option, buy that amount of stock on the open market for $5 and sell it for $10 to whoever sold me the put option, doubling my investment. Of course, if the stock instead goes to $12 then my option to sell it at $10 is worthless but I’ve lost only the cost of the put option.