Common forms of option

Sam · Posted: Sat Apr 10, 2004 4:16 am Post subject: Common forms of option

Option is a provision in a contract that gives the option holder, the right and not the obligation to perform a specific transaction with another party, the option issuer. The contract is based on certain terms agreed upon by both the parties. For instance, the owner of a property may sell an option to another party for the purchase of a property. A lease may consist of a provision granting the renter an option to extend the lease for an additional year.

The common forms of options are:

Call option:
This gives an option holder the right to purchase an underlier, which is the asset delivered under the contract. The underlier is purchased usually at a specified price. In case of a mortgage deed, the call option allows the lender to call the mortgage due and payable at any time before the end of the loan term.
Put option:
The put option offers the option holder the right to sell an underlier at a pre-determined price. It gives a buyer the right to sell a commodity to the seller of the option at a certain time for a certain price. Under the put option, the seller is obligated to purchase the asset at the specified price.

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