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.
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.
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.
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.
- signing a contract image by William Berry from Fotolia.com