option
In the context of commercial law, an option is a contractual right, but not an obligation, to buy, sell, or enter another transaction on specified terms during the time allowed by the option. The party granting the option is often called the optionor, and the holder is often called the optionee. If the option is enforceable, the optionor remains bound during the option period while the optionee decides whether to exercise the right.
In general contract law, an option contract is an agreement that limits the offeror's power to revoke an offer. It is commonly supported by consideration for the promise to keep the offer open, although there are different statutory mechanisms available. The option holder must generally exercise the option in accordance with its stated time, manner, and other conditions. If the holder does not exercise the option before it expires, the option ordinarily ends.
The UCC firm-offer rule provides a different way to make certain offers irrevocable without consideration. Under UCC § 2-205, a merchant's signed written offer to buy or sell goods that assures it will be held open can be irrevocable without consideration for the stated time, or for a reasonable time if none is stated. The period of irrevocability without consideration may not exceed three months. If the assurance appears on a form supplied by the offeree, the offeror must separately sign that term. The rule applies even though the offeror receives no consideration for keeping the offer open.
Options are used in real-estate and business transactions, including rights to purchase real property, shares, or assets at a stated price or under a pricing formula. An option differs from a right of first refusal: an option may generally be exercised on its agreed terms without waiting for the owner to decide to sell, while a right of first refusal is typically triggered by the owner's decision to sell or by a third-party offer.
In securities markets, a call option gives the buyer the right to buy an underlying security at the strike price under the option's terms, while a put option gives the buyer the right to sell the underlying security under the option's terms. The option seller, or writer, has the corresponding obligation under the contract if the option is exercised. The Securities Act of 1933 includes many puts, calls, and options within the definition of a security. Options may also appear as stock options in employment compensation or corporate transactions. The governing agreement and applicable law determine exercise procedures, transferability, expiration, remedies, and tax consequences.
[Last reviewed in August of 2026 by the Wex Definitions Team]
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