The management at PhoneUn considered the option to abandon when building their new manufacturing plant. The design of the plant allows it to be easily converted to manufacture other types of large machinery. If its new line of cars is poorly received, its plant should be easy to sell to another manufacturing company. In this example, the price at which they expect to sell the plant if things go poorly resembles:

Question

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The price at which they expect to sell the plant if things go poorly represents the strike price of a put option on the plant. This is because they are essentially buying insurance against the possibility of losing money on the plant's investment. Just like in a put option, they have the right to sell the plant (exercise the option) at a certain price (strike price) if things do not go as planned.

The Management at PhoneUn Considered the Option to Abandon When