Option Agreements (Drafting)
Option Agreements are legal contract between an owner and potential purchaser be it of a site, a house builder or developer. The option holder essentially has the opportunity of purchasing the property from the owner at an agreed price within a fixed time frame, once the terms within the option have been met. Most popularly, an Option Agreement is entered between Landowner and developers followed by trading in securities in connection with securities market.
Option Agreement benefits both landowners and developers, a landowner has the comfort of a developer promoting their site for development; and the developer has some security with regards to future pipeline for delivery, typically at a discounted purchase price to reflect the planning risks.
FEATURES OF OPTION AGREEMENT:
1.PREMIUM OR DOWN PAYMENT: The holder of this type of contract must pay a certain amount called the ‘premium’ for having the right to exercise an options trade. In case the holder does not exercise it, s/he loses the premium amount.
2.STRIKE PRICE: This refers to the rate at which the owner of the option can buy or sell the underlying security if s/he decides to exercise the contract. The strike price is fixed and does not change during the entire period of the validity of the contract.
CONTRACT SIZE: The contract size is the deliverable quantity of an underlying asset in an options contract. These quantities are fixed for an asset. If the contract is for 100 shares, then when a holder exercises one option contract, there will be a buying or selling of 100 shares.