What Is Options in Contract Law

Options in Contract Law: Understanding its Basics

Options in contract law refer to the right given to a party to buy or sell a property or asset at a particular price and within a specific time frame. It is a legal agreement that outlines the terms and conditions between two parties regarding the option to exercise rights on a property or asset. In this article, we will discuss the basics of options in contract law, its types, and how it works.

Types of Options

1. Call Option

A call option is an agreement that gives the owner the right to buy a property or asset at a specific price within a particular period. Call options are usually used in the stock market, wherein investors purchase the rights to buy stocks at a predetermined price.

2. Put Option

A put option is an agreement that gives the owner the right to sell a property or asset at a specific price within a particular period. This type of option is commonly used in real estate, where buyers can purchase the right to sell a property at a predetermined price.

3. American Option

An American option is an agreement that allows the owner to exercise the option at any time before its expiry date. This type of option is suitable for investors who may need to sell their assets at any time rather than waiting for a specific expiry date.

4. European Option

A European option is an agreement that allows the owner to exercise the option at its expiry date only. This type of option is suitable for investors who are more concerned about the price of the asset at the expiry date rather than the option to sell before the expiry.

How an Option Works

Suppose you are interested in buying a property valued at $300,000. The seller may offer an option to purchase the property within the next six months for $300,000. You would pay a fee (known as the option fee) to the seller for the right to purchase the property at the predetermined price.

When you exercise your option, you would purchase the property for the pre-determined price of $300,000. If the property value increases above $300,000 during the six-month period, the option would be beneficial for you, enabling you to purchase the property at a lower price. However, if the property value decreases, you may choose not to exercise the option and forfeit the option fee paid to the seller.

Conclusion

Options in contract law provide parties with the flexibility to negotiate the purchase or sale of a property or asset without committing to a price or deal. It allows investors to hedge against potential losses and minimize their risks. Understanding the basics of options in contract law is essential when considering the purchase or sale of a property or asset. It is recommended that you seek legal advice before engaging in any options contract.