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What Is an Options Contract?

An options contract is an agreement between two parties with the purpose of giving the holder of the contract the right to buy or sell the underlying asset at a specified price within a certain time.

Common types of assets an options contract may cover include:

  • Stocks
  • Securities
  • Real Estate

Possibly the most important aspect of an options contract is that while it gives someone the right to buy or sell an asset, the individual who purchases the option is not required to buy or sell.

There are two kinds of options contracts, called call and put options. You can buy options contracts to speculate on stocks, or you can sell these contracts to generate income.

Typical stock options contracts cover 100 shares of an underlying stock, although this amount can be adjusted for:

  • Mergers
  • Special dividends
  • Stock splits

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How Does an Options Contract Work?

An options contract includes terms that specify:

  • The contract's expiration date
  • The strike price, or the price at which an underlying asset may be transacted
  • The underlying asset

You can generally purchase call options as a leveraged bet on a stock or index's appreciation. You generally purchase put options, on the other hand, to make a profit when prices decline.

Call option buyers have the right, but are not required, to buy the amount of shares that the contract covers at the set strike price. The opposite is also true: Put buyers have the right but are not required to sell their shares at the strike price a contract sets.

However, option sellers must transact their side of any trade if the buyer chooses to either execute the call option and purchase the underlying asset or execute the put option to sell the underlying asset.

Traders typically use options for hedging or speculation. This is because options usually cost just a part of what the underlying securities themselves would cost. You can use options as a way of getting leverage, as they allow an investor to bet on a stock without needing to buy or sell those shares outright.

What Is a Put Option?

You would typically purchase a put option when you expect to profit from the price of an asset declining. Buyers of a put option own a right to sell their shares at the strike price listed in the contract.

The buyer of a put option can only exercise their right to sell the shares to the seller of the contract at the strike price. The buyer also has the option to sell their contract if the shares aren't held in the portfolio.

What Is a Call Option?

You would typically buy a call option to leverage the price of an asset such as a stock, index, or other asset. You have the right to buy a set amount of shares at the strike price, but are not obligated to make the purchase. The contract should specify both the number of shares (or other assets) you purchase as well as the strike price.

When a call option transaction occurs, the position opens when the buyer purchases a contract from the seller. The seller is also called a writer in these transactions. The seller of a call option receives a premium when they assume the obligation to sell their shares at the strike price. The buyer benefits by getting the option to purchase the asset at the strike price, no matter if the value of the asset increases above that price in the period of time covered by the contract.

Here is an article with more information about put and call options.

Why Do People Choose Options Contracts?

Options contracts have a few different advantages. These benefits include:

  • The seller receives a premium: The seller of an options contract receives a payment (the premium). They get that premium regardless of what happens with the contract after that point. That's why you'll find options traders who use received premiums as a big amount of their portfolio income.
  • The buyer can lock in their right, without paying a lot: The buyer of the option also benefits. They can lock in their right to acquire the asset involved in the contract while only putting up a small amount of their money upfront. Since options contracts usually cost just a part of what the stock or other asset would cost — and the strike price is only due if the owner of the option decides to exercise their contract — the contract owner can gain the right to buy the asset at an attractive price.
  • Options contracts give investors flexibility: If an investor uses options contracts well, it gives them the flexibility to take action with their portfolio and can help control risk while maximizing returns.

Options contract

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Common Areas Where Options Contracts Are Used

You will most frequently see option contracts in the financial industry. Options contracts are also sometimes found in real estate.

Options Contracts in Financial Industry

You can option the chance to buy or sell stock at a certain price for a specified period of time. Again, the buyer of the option is not obligated to exercise their option.

Options Contracts in Real Estate

Option contracts are sometimes used in real estate transactions. This is because a potential buyer of a property often needs additional time to complete steps such as securing funding and inspecting the property before they make an actual purchase. A seller and potential buyer can therefore agree on a certain selling amount while the buyer completes any necessary steps. Once the buyer agrees to terms within that set time period, the parties can create a binding contract for the transaction.

Here is an article with further reading about real estate options.

Options Contracts as Part of an Employment Offer

Many companies, especially startup companies and small businesses, offer options contracts as part of their benefits package. Employee options contracts offer employees the option to purchase stock in their company at a very reduced price. However, the price of the stock is determined by the option contract.

This arrangement has benefits for both the employer and employee. Both the business and the employee hope the company stock will rise in price, giving the employee incentive to work hard to make that happen.

What Is Included in an Options Contract?

Options contracts contain the elements of a typical contract, including:

  • The offer made by a promisor
  • The acceptance of a promisee
  • Consideration (this is the exchange of something of value for something else of value)
  • Mutuality of parties
  • Legal capacity for parties to enter into the contract
  • Legally acceptable terms

An options contract will typically include the following additional elements:

  • The underlying security
  • The type of option (whether it is a call option or a put option)
  • The commodity involved in the contract
  • The date on which the contract is enforced
  • The strike price
  • The expiration date

You may want to use an options contract to purchase stock options or real estate, or you may wish to offer stock options to employees. It's important to work with an experienced lawyer when creating these contracts.

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Michael B. on ContractsCounsel
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4.8 (13)
Member Since:
October 30, 2020

Michael B.

Attorney
Free Consultation
Illinois
14 Yrs Experience
Licensed in IL, MN, WI
University of the Pacific

Michael has extensive experience advising companies from start-ups to established publicly-traded companies . He has represented businesses in a wide array of fields IT consulting, software solutions, web design/ development, financial services, SaaS, data storage, and others. Areas of expertise include contract drafting and negotiation, terms of use, business structuring and funding, company and employee policies, general transactional issues as well as licensing and regulatory compliance. His prior experience before entering private practice includes negotiating sales contracts for a Fortune 500 healthcare company, as well as regulatory compliance contracts for a publicly traded dental manufacturer. Mr. Brennan firmly believes that every business deserves a lawyer that is both responsive and dependable, and he strives to provide that type of service to every client.

Nicholas V. on ContractsCounsel
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5.0 (12)
Member Since:
February 28, 2022

Nicholas V.

Attorney
Free Consultation
Denver, CO
6 Yrs Experience
Licensed in AL, CO, NY, TX
Texas A&M University School of Law

I am a solo practitioner with offices in Denver, Colorado and Austin, Texas with a focus on general business and real estate contracts.

Harry S. on ContractsCounsel
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July 27, 2021

Harry S.

Director
Free Consultation
London
10 Yrs Experience
Licensed in NY
BPP

Stirk Law is a law firm based in London that advises on dispute resolution, commercial and corporate arrangements, employment and private wealth. We are experts in our areas and experienced in advising on complex and high value matters in the UK and internationally. We have extensive onshore and offshore experience across a variety of areas such as the administration of trusts together with complex fraud and trust disputes. Our expertise includes the conduct of significant and high-value cases valued at up to in excess of £1 billion over a combined 40 years of legal practice in England, Jersey and Guernsey. As well as having a large international network, we work closely with a corporate investigations and risk advisory business based in London and Vienna. Together we can deliver a holistic service for cases involving fraud, dissipation of assets or other illegal activity.

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Stanley K.

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Free Consultation
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30 Yrs Experience
Licensed in CA, MA, TX
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Stan provides legal services to small to medium-sized clients in the New England region, and throughout the U.S. and abroad. His clients are involved in a variety of business sectors, including software development, e-commerce, investment management and advising, health care, manufacturing, biotechnology, telecommunications, retailing, and consulting and other services. Stan focuses on the unique needs of each of his clients, and seeks to establish long term relationships with them by providing timely, highly professional services and practical business judgment. Each client's objectives, business and management styles are carefully considered to help him provide more focused and relevant services. Stan also acts as an outsourced general counsel for some of his clients for the general management of their legal function, including the establishment of budgets, creation of internal compliance procedures, and the oversight of litigation or other outside legal services.

Sam W. on ContractsCounsel
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July 30, 2021

Sam W.

Entertainment attorney
Free Consultation
Los Angeles
10 Yrs Experience
Licensed in CA
Columbus School of Law, The Catholic University of America

Sam Widdoes has practiced law in California since 2014. He began his career as a litigation associate at a boutique firm in Los Angeles, and founded a production development company with a partner in 2017. Since then, Sam has served as the head of business and legal affairs at District 33, while working hand-in-hand with writers, directors and actors to develop, pitch and produce scripted and unscripted content. In that role, Sam produced the documentary series BLACKBALLED for Quibi/Roku, and will produce the upcoming documentary feature AS WE SPEAK directed by J.M. Harper for Paramount+/MTV, and the doc series THE BLACK BOX for MRC and XYZ Films. He is also the executive producer of an upcoming limited series with CBS TV starring Judith Light and Noah Wyle called SHADOWS IN THE VINEYARD, and a feature comedy for Spyglass Entertainment, among other projects. In early 2022, Sam opened WIDDOES LAW, APC, after recognizing a need for experienced legal services in the unscripted and documentary spaces. Since opening his own practice, Sam has advised producers, editors, directors and rights holders on a variety of agreement negotiations, including option purchase contracts, collaboration agreements and documentary producer deals. Sam also serves as production counsel for several documentary features, series and short films, and will draft, negotiate and advise on all legal aspects of the projects, including financing, production and distribution. Sam earned his Juris Doctor from The Catholic University of America, Columbus School of Law in 2013, where he graduated on the Dean's List and as a member of the Society of Trial Advocates. He holds a BA in journalism from the University of Richmond, and sits on the Board of Trustees at Turning Point School in Culver City, California. Sam is passionate about quality storytelling, and supporting those with the vision and drive to share their stories with the world.

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Real Estate

Options Contract

Pennsylvania

Asked on Sep 23, 2021

Can you draft a real estate option agreement that is legal in PA and NY?

Hi, My name is Shawn Mallett. I am a real estate marketer and seller that is not real estate salesperson licensed. Can you confirm whether or not it is legal for me to utilize an option to purchase contract with a seller/wholesaler with the intention to sell and assign the contract (with the seller knowing this intention) rather than the intention to close on it myself? How much would you charge to confirm the legality of the following contract in both PA and NY and make the appropriate changes if needed? Option to Purchase Real Estate Agreement Date: 06/21/2021 This option agreement is entered between the Parties, Optionor(s) and Optionee(s), below in consideration of and subject to the following terms and conditions. 1. Parties ________________ and/or assigns as Optionee and _________________ as Optionor. 2. Property located in the Town of _________, County of _________, state of _________, to wit: Lot: ___________ Grid Number: ____________ 3. Offer: Optionee has the option to purchase this property at a price of __________________. 4. Period: 3 Years (1,095 days) 5. Terms and Conditions: ‐ Optionor understands that Optionees’s intention is to find an End‐ Buyer and assign this option agreement to that End‐Buyer for a fee (paid by the End‐Buyer). ‐ Optionor understands that Optionee is acting as a principal in the transaction and is not working as a licensed real estate broker representing anyone in the transaction. ‐ Upon Optionee’s decision to exercise this option, both parties agree to move forward with the necessary standard purchase and sales agreement. ‐ Optionor may cancel this agreement at any time if they find their own End‐ Buyer or decide not to sell. This cancellation must be done in writing. ‐ Optionor agrees to allow Optionee to advertise the property for sale. ‐ If Optionee does not acquire an End‐Buyer to assign this deal to within 3 years (three year) of acceptance of this Option Agreement, this agreement becomes null and void. ‐ All parties agree that property is sold in “as is” present condition unless noted otherwise. ‐ Time is of the essence in this agreement. OPTIONOR:____________________ DATE: 06/21/2021 OPTIONEE:__________________________________________________________________DATE: 06/21/2021 Thanks.

Samuel R.

Answered Oct 6, 2021

Yes I can draft this agreement for you.

Read 1 attorney answer>

Business Contracts

Options Contract

California

Asked on Oct 10, 2022

Can I negotiate my stock option agreement?

I am being offered stock options by a potential employer. What can I negotiate?

Michael M.

Answered Oct 11, 2022

In general a stock option agreement is a mutually agreed upon contract. However, these documents must conform to to the terms of the Stock Option Plan. Typically, the only true negotiable item is the quantity of options one is receiving but each situation is fact specific.

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