Do you use free options?


My friend Jan brought up the subject of free options over coffee. When he travels a longer distance by rail in Germany, say from Hamburg to Berlin, he always pays a euro more to have a small village, instead of a major city, as his final destination.

The reason is that Deutsche Bahn, the German railway company, refunds 25% of the ticket if a passenger is delayed by more than 60 minutes. By selecting a nearby village that only has an hourly connection with the arrival city as his destination, it is likely that he will be delayed by more than an hour. For that to happen a train only needs to be a few minutes late and that is quite common. The only place where this would not work is in Japan.

So for a €1 investment, Jan buys the option to get a probable refund of a part of the train ticket. A great deal.

You probably observed that this option is not really free. Free options do not exist. There is always a small cost in terms of effort and/or price. One euro in the example, or the effort of asking for a discount. But to make things easier, let ́s consider all options with a limited cost compared to the expected payout as free options.  

I use free options with hotel reservations. When I am not sure if I will go to a conference that is held months later, I book a hotel that offers free cancelation. The closer you get to the date of the conference, the higher room prices tend to be. The free cancelation option is a way of locking in a rate in advance.

In addition to the two examples above, there must be a huge number of other free options that I have not realised existed. Have you identified any? Please send me an email to let me know! 

When I have received enough suggestions I will publish them in a new post so we can all benefit.

Thanks to Jan for inspiring this post!

About the author

Ivo Oltmans
By Ivo Oltmans


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