{"id":4380,"date":"2016-04-04T10:47:30","date_gmt":"2016-04-04T15:47:30","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-law\/smallbusiness\/business-contracts-forms\/what-is-an-option-contract.html"},"modified":"2025-01-13T14:30:17","modified_gmt":"2025-01-13T19:30:17","slug":"what-is-an-option-contract","status":"publish","type":"page","link":"https:\/\/www.findlaw.com\/smallbusiness\/business-contracts-forms\/what-is-an-option-contract.html","title":{"rendered":"What Is an Option Contract?"},"content":{"rendered":"\n
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What Is an Option Contract?<\/h1>\n
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\n By FindLaw Staff<\/a> | Legally reviewed by Aviana Cooper, Esq.<\/a>\n | Last updated\n
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An option contract is a legal agreement in which the seller agrees to keep an offer open for a specified period of time in exchange for payment, allowing the buyer the option to purchase or sell an asset within that time. Commonly used in financial markets and real estate, these contracts are beneficial for hedging against price fluctuations and securing favorable terms.<\/p>\r\n

There are two main types of option contracts: call options, which allow buying at the strike price, and put options, which would enable selling. In financial services, option contracts can involve buying or selling stocks at a predetermined price, known as the strike price, before expiration. Option contracts are also used in employee benefit packages, particularly in start-ups, offering employees the chance to buy company stock at reduced prices.<\/p>\r\n

Option Contracts at a Glance<\/b><\/h2>\r\n

One of the lesser-known types of contracts<\/a> is an option contract. In a typical option contract, the seller agrees to keep an offer open for a certain amount of time. The buyer of the option has to give the seller some payment in exchange. In other words, in an option contract, the seller agrees to keep the "option" to purchase open for the buyer for a specified period.<\/p>\r\n

Options trading contracts, a type of derivative, are most commonly associated with the financial services industry. A seller may have the opportunity to purchase stock at a certain price for a specified period of time. By accepting money in exchange for this option to buy the underlying stock, the seller has essentially provided a warranty that they won’t revoke the offer.<\/p>\r\n

It’s important to point out that the party buying the stock option is under no obligation to exercise this option and purchase the underlying security since they only bargained for the option to do so.<\/p>\r\n

These contracts are also common in real estate transactions<\/a> where it may take a while for a potential buyer to conduct a full inspection of the property and secure funding, among other steps. In this case, the seller and the prospective buyer may agree on a certain amount, for example, but the buyer needs to meet with their bank before fully committing. If the buyer agrees to the terms of the contract, then a binding contract is created for the deal. They are also common in the formation of joint ventures.<\/p>\r\n

The option expires at the end of the time frame stated in the contract, regardless of whether the buyer exercises the option.<\/p>\r\n

Different Types of Option Contracts<\/b><\/h2>\r\n

There are two kinds of options contracts:<\/p>\r\n