What Is an Option to Purchase Agreement?

by Aleks Volkov ; Updated July 27, 2017
An option to buy contract is used in options trading.

An option to purchase agreement is a contract between a buyer and seller, which gives the buyer the option, but not the obligation, to purchase some sort of property at an agreed upon price prior to the maturity date of the option. Option contracts can be used for various properties including real estate, foreign currency and stocks.

The Facts

An option to purchase agreement gives the holder the right to buy something at an agreed upon price. However, the holder does not need to purchase the item if he chooses to. The writer of the option must sell the property if the option is exercised.

Option Writer

Although the writer of the option must sell the property if the holder exercises the option, the writer also collects a fee for the option. As a result, if the option is not exercised, the writer does not sell the property, but still earns a profit on the option.

Video of the Day

Brought to you by Sapling
Brought to you by Sapling

Option Holder

Investors often purchase options to either hedge an existing position or to take a directional bet on a security. Because the holders do not have to exercise the option, they only lose the price they paid on the option if they bet the wrong way.

About the Author

Aleks is an aspiring author from New Jersey. With over 150 articles published on eHow.com, he uses his love of writing to help share his expertise in many areas including finance and sports related training. He is currently continuing his education at the University of Delaware and plans to graduate from grad school in spring of 2011.

Photo Credits

  • signing a contract image by William Berry from Fotolia.com
Cite this Article A tool to create a citation to reference this article Cite this Article