An option contract gives a person the right to buy or sell something at a specified price within a specified time. There are two types of options contracts, call options and put options.
A call option gives the buyer the right to buy something at some time in the future at a price agreed at the time the call option is agreed. Conversely, a put option gives the seller the right to sell something at some time in the future at a price agreed at the time the call option is agreed. Such option contracts are often used when buying and selling shares.
Option contracts are useful when parties need some time to consider an offer. In an option contract, one party pays for the sole right to accept an offer during a fixed period. This gives the potential buyer an opportunity to consider the deal without having to worry that someone else will buy it, or that the terms of the deal will change.
Although the price of an option contract is fixed at the time the option is agreed, such contracts can lead to legal disputes. The automobile companies Fiat and VEBA took their dispute to a Delaware court over the price Fiat agreed to pay for 16.4 percent of Chrysler over a three year period. The price was determined by a formula called the VEBA Call Option worked out in 2009, when Chrysler was exiting bankruptcy.