In sponsored search, advertisement (abbreviated ad) slots are usually sold by a search engine to an advertiser through an auction mechanism in which advertisers bid on keywords. In theory, auction mechanisms have many desirable economic properties. However, keyword auctions have a number of limitations including: the uncertainty in payment prices for advertisers; the volatility in the search engines revenue; and the weak loyalty between advertiser and search engine. In this paper we propose a special ad option that alleviates these problems. In our proposal, an advertiser can purchase an option from a search engine in advance by paying an upfront fee, known as the option price. He then has the right, but no obligation, to purchase among the pre-specified set of keywords at the fixed cost-per-clicks (CPCs) for a specified number of clicks in a specified period of time. The proposed option is closely related to a special exotic option in finance that contains multiple underlying assets (multi-keyword) and is also multi-exercisable (multi-click). This novel structure has many benefits: advertisers can have reduced uncertainty in advertising; the search engine can improve the advertisers loyalty as well as obtain a stable and increased expected revenue over time. Since the proposed ad option can be implemented in conjunction with the existing keyword auctions, the option price and corresponding fixed CPCs must be set such that there is no arbitrage between the two markets. Option pricing methods are discussed and our experimental results validate the development. Compared to keyword auctions, a search engine can have an increased expected revenue by selling an ad option.
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