Options: The Privilege of Retaining Optionality
Imagine a prime commercial spot in a newly developed business district. Lao Zhang wants to rent it for a restaurant. The rent is steep, and the landlord requires a minimum five-year lease.
In an unpredictable environment, Lao Zhang worries: what if the business fails? Wouldn’t five years of rent be money down the drain? A friend suggests, “Why not ask the landlord for a discount?”
Instead, after negotiating, Lao Zhang doesn’t get a discount—he actually pays 20% more in rent. The condition? After one year, Lao Zhang has the right to renew for another four years at a pre-locked price, and the landlord cannot refuse or raise the rent. If Lao Zhang chooses not to renew, he can simply walk away without any penalty.
The landlord feels he hasn’t lost out; after all, he gets 20% extra rent for the first year and assumes he can easily find another tenant later if needed. Lao Zhang says, “I bought an option.”
When you’re uncertain about a situation, it’s often best not to commit too early—you can leave yourself an “Option.”
✵
An option is originally a financial concept. It means you have the right, but not the obligation, to buy or sell an asset at a predetermined price within a certain timeframe.
Suppose you are bullish on a certain stock but uncertain about its trend over the next three months. You buy a Call Option: it allows you to buy 100 shares of the stock (the Underlying Asset) three months from now (the Expiration Date) at $100 per share (the Strike Price). To obtain this right, you pay a small fee now—say $5 per share—known as the Premium.
If the stock price rises to $150 in three months, great! You can still buy at the $100 strike price and immediately enjoy a $50 profit per share. If the price drops to $80, you simply choose not to exercise the option and walk away. Your only loss is the $5 premium you paid upfront.
There are also Put Options, which grant the right to sell at a guaranteed high price even if the market crashes.
But options aren’t just for Wall Street; they apply to many fields. We can treat them as a decision-making tool. Simply put, an option is your choice: it is a right, not an obligation.
✵
Note that not every “wait and see” qualifies as an option.
You have the right to register a company and become a boss right now, but what does that mean? In a market economy, anyone can start a company. The value of an option lies not in general freedom, but in the scarce privilege it provides—something others don’t have.
Strategy scholar Rita Gunther McGrath—a key promoter of “real options strategy”—argued in a 2004 paper [1] that for an option to have value, two conditions must be met: first, multiple possible future paths must exist; second, you must have proprietary access to one of those outcomes.
An option exists only when others are locked out, and only you are qualified to enter—yet you can still choose not to.
Examples include: establishing trust with a client early; maintaining a professional relationship that allows you to return after resigning; securing exclusive agency; locking in a favorable price; or securing a spot that others don’t have. Options are possibilities encapsulated by systems, resources, relationships, and time windows.
Since it is a privilege, it comes at a cost. You have to manage it. Let’s look at some scenarios that don’t sound like options but actually are.
✵
Scientists conducting experiments and entrepreneurs developing a Minimum Viable Product (MVP) are essentially buying call options.
You invest money, time, and energy as the “premium,” but your investment is limited and your failure is survivable. Compared to full-scale commercial operations or mass production, the tinkering of R&D staff in a lab is negligible. But once successful, you have the right to scale up and enjoy exclusive profits.
Modern software engineering uses a methodology called Agile Development, which is essentially the systematization of experimentation.
Traditional project management is the so-called Waterfall model, where a complete plan is made at the start: requirements are defined, architecture is set, and a schedule is fixed. Execution flows like a waterfall from upstream to downstream, as if the future is just waiting to be implemented. This locks in all decisions from the start. But what if the real world doesn’t cooperate with your PowerPoint? Requirements change, technology evolves, customers shift, and competitors move. Discovering you’re in the wrong direction results in a high-cost restart.
The logic of Agile is to break a large project into a series of short-cycle small steps: build a minimum viable version, release it quickly, observe user reactions, and adjust the next step based on feedback.
Agile encourages you to postpone decisions for each step until the “last responsible moment” [2].
Agile is about learning first, then locking in—using small costs to buy information through constant experimentation. In contrast, Waterfall is about locking in first, then praying.
Trial and error isn’t expensive; the most expensive thing is going all-in while ignorant. Experimentation isn’t indecisiveness; it’s not even about proving you’re right—it’s about discovering you’re wrong cheaply.
✵
Another type of call option is the “Right of First Refusal” (ROFR) [3].
Suppose you, as an investor, like a small startup. You see potential, but the valuation is uncertain. If you buy it now, the price is too high; but you worry that if it proves to be a great company, someone else will snap it up.
You can invest a smaller amount for some equity but demand a “Right of First Refusal.” This means if someone wants to buy the company in the future, they must ask you first. If you are willing to match their terms, the seller must sell to you. Of course, you can also decline, allowing them to sell to others.
Writers and artists are often asked to sign ROFR clauses: “Your next work must be offered to us first under equal conditions.”
A simpler scenario is renting. A landlord wants to rent out a house now but considers that prices might rise and wants to keep the freedom to sell. The tenant can’t afford a down payment yet but doesn’t want the hassle of moving later. They can agree that if the landlord decides to sell and receives a third-party offer, the tenant has the right to see that offer and decide whether to buy under the same terms. The tenant gains initiative, and the landlord doesn’t lose freedom.
✵
BATNA, short for “Best Alternative to a Negotiated Agreement” [4], is equivalent to a put option.
For example, if you want to negotiate a raise with your boss and go in unprepared, you’re at a disadvantage. If the talk fails, you might have to resign to prove your threat was valid, then scramble for a job. But if you already have a formal offer from another company—even if the salary isn’t quite as high—that is your BATNA.
BATNA is your way out. If the deal fails, it’s fine; you have other options. BATNA turns a negotiation from “pleading for a price” into “comparing two executable plans.” It gives you bargaining power and the confidence to walk away.
A negotiation without a BATNA isn’t a negotiation; it’s a plea.
If you have a BATNA, let the other party feel that you have a fallback, but don’t expose all the details. The worst mistake in negotiation is revealing all the facts at once:
- Don’t say: “I have two other offers for X and Y dollars.”
- Say: “I am currently evaluating several options simultaneously, so I am focusing on the overall package and long-term growth potential.”
The term BATNA was coined by the Harvard Negotiation Project. Their advice: don’t bluff. If the external option isn’t real, you’re in a dangerous position.
✵
Contingent contracts (or “betting” agreements) are another form of option. They turn one party’s right into another’s obligation, suitable for situations where two parties have vastly different views of the future: one is bullish, the other bearish.
A founder says, “My company’s revenue will triple next year, so the valuation must be high!” An investor says, “That’s pure fantasy; the valuation should be halved!” Since neither can convince the other, they sign a contingent contract: invest a smaller amount first—if revenue hits the target next year, compensate at the high valuation; if not, stick to the low valuation.
Professional managers linking their income to company profits, construction contracts with bonuses for timely completion, and cooperation agreements between platforms and content providers based on “upfront payment + milestones + royalties”—these are essentially contingent contracts.
We don’t have to agree today, but we can still cooperate by betting on our respective judgments.
✵
The value of an option is the retention of choice. In high-uncertainty situations, optionality itself is a form of power. This brings us back to the “Capability Seeking Theorem”—increasing your capability is about acquiring more options.
Consider an extreme example. Some countries, like Japan, have long possessed the capability to manufacture nuclear weapons—technology, materials, and facilities are all there. They could likely assemble an atomic bomb in months. Yet, they don’t take the final step. Why?
Because once you cross that line (commit), you face international sanctions and close off your diplomatic room for maneuver. By maintaining the state of “I can build it anytime, but I haven’t today,” you still enjoy nuclear deterrence and retain negotiating space. In international politics, this is called “nuclear latency” [5].
Ambiguity is also an attitude. Having options gives you leverage. Standing at the door and walking through it are two different things.
Those with options don’t need to rush to take a stand. But if you don’t have an option, you’d better buy one quickly.
✵
In his 2015 letter to Amazon shareholders, Jeff Bezos categorized decisions into two types: “Two-way doors” (reversible choices) and "One-way doors" (irreversible choices) [6]. His insight: for two-way doors, move fast. You need to quickly find out if it works; if not, you can retreat immediately. For one-way doors, since you can’t go back, you must think twice.
In terms of this lesson, going through a two-way door is like buying an option. Changing a webpage color, using a new tool, trying a channel, or starting a side hustle—these are two-way doors where employees should be allowed to fail fast. If you insist on bureaucratic approval for everything, the organization slows down, people become timid, and innovation withers.
But for one-way doors, we must be prudent. Once you pass through—once you commit—don’t keep looking back at the door. Marriage, starting a business, choosing partners, or core career paths—you can’t change your mind constantly. Some things require locking in the path so that long-term operation can harvest compound interest.
Humans have invented many ways to turn one-way doors into two-way doors. Dating before marriage, internships before long-term contracts, trials before major purchases—these are all about buying an option before deciding to commit.
✵
But options aren’t necessarily “the more the better,” and they certainly aren’t meant to be held forever. Many options have holding costs and will expire. Financial theory tells us: the greater the market volatility, the higher the option value; the shorter the time to expiration, the lower the option value.
If a situation has only two outcomes and one is absolutely unacceptable to you, don’t overthink it—commit to the direction you can accept and give it your all. This is the wisdom of “burning your boats”: actively cutting off your own options and giving up optionality to demonstrate determination, making your commitment credible and coordinating cooperation [7].
However, some people in life are too desperate to keep their options open, even at high costs [8]. For instance, those who stay in long-term relationships without marrying as they age, or those who collect degree after degree because they can’t accept starting a job… they want to be a wave function that never collapses, staying in a state of perpetual possibility, unaware that their options have already expired.
✵
The reality is that people often confuse “option value” with “actual value.” Why is it that the smartest kids in class don’t always achieve the most, while those who were sociable but perhaps not top-tier students often do well? Because intelligence is just an option.
Intelligence gives you an admission ticket, the possibility of understanding things faster and seeing opportunities earlier than others—but it is only a possibility. If intelligence isn’t combined with execution, emotional stability, collaboration, and luck to be converted into real delivery and credit, this option cannot be cashed in.
Conversely, good social relationships contribute to our physical and mental health; they are an actual value, perhaps even an ultimate value.
But from a risk management perspective, social relationships also have option-like qualities. Close friends are your put options: if you suffer misfortune, they provide a safety net. Strangers are call options: new friends might bring new, perhaps better, opportunities for cooperation. Both types of relationships should be maintained.
Many people reach a certain age and only want to deal with old acquaintances because they don’t plan to start any new ventures. Yet some are harsh to their close friends while always smiling at strangers… are they perhaps too “bullish” on themselves?
—\
[Closing Poem]
May you be a person with options. Before the answer becomes clear, You are in no rush to turn in your paper. You walk in the wind, With several possibilities in your pocket. When the tide rises, You can set sail for distant lands; When the tide recedes, You can safely come ashore. Some doors you push open, For others, you just remember the way. When the dust settles, And the world declares its price— You, unhurried and calm, Exercise your right with grace.
—\
Notes
[1] McGrath, Rita Gunther, Walter J. Ferrier, and Aubrey L. Mendelow. “Real Options as Engines of Choice and Heterogeneity.” Academy of Management Review 29, no. 1 (2004): 86–101.
[2] Poppendieck, Mary, and Tom Poppendieck. Lean Software Development: An Agile Toolkit. Boston: Addison-Wesley, 2003, 57–59; Agile Alliance. “What Is Simple Design?” Agile Alliance Glossary; Van Schooenderwoert, Nancy. “Delaying Circuit Board Spin Till Last Responsible Moment.” Agile Alliance, January 13, 2016.
[3] Program on Negotiation at Harvard Law School. “Right of First Refusal: A Tool to Negotiate with Care,” 2021; “Right of First Refusal: A Potentially Win-Win Negotiation Tool,” 2026.
[4] Subramanian, Guhan. “What Is BATNA? How to Find Your Best Alternative to a Negotiated Agreement.” Program on Negotiation at Harvard Law School, 2026.
[5] Pilat, Joseph F. “Exploring Nuclear Latency.” Wilson Center, 2015; Volpe, Tristan. “Atomic Leverage: Compellence with Nuclear Latency.” Carnegie Endowment for International Peace, 2017.
[6] Bezos, Jeff. Amazon Shareholder Letter, 2015. Filed with the U.S. Securities and Exchange Commission as Exhibit 99.1, 2016.
[7] "Elite Daily Lessons" Season 3, Game Theory 9. "If a leader’s own conduct is not correct, although he may give orders, they will not be followed."
[8] Shin, Jiwoong, and Dan Ariely. “Keeping Doors Open: The Effect of Unavailability on Incentives to Keep Options Viable.” Management Science 50, no. 5 (2004): 575–586.