Take a stock trading at $50. In a bet on this stock, long will lose if the price falls; short, if it rises. Now, if one side prepays his potential loss, the bet becomes an option. If long prepays, the option is a call. If short prepays, it is a put.

Traders and academics have misunderstood this as a right to buy and sell.

The potential loss is unknown. For one side to prepay it - before the outcome is known - both sides must agree on the future course of the stock price. Suppose they agree that it will rise to $58 and fall to $38:

The most critical point about options is this: the "correct" amounts of prepayment for long and short - the call and put values - are not the obvious $12 and $8 that the numbers suggests, but a fraction of them. Therein lies the "enigma of options."