What Does Put Option Agreement Mean

The main advantages of using a call and option agreement instead of a normal purchase agreement are the potential tax benefits. By using a put and call option contract, you can: If and when the option is exercised, a binding contract for the purchase and sale of the property is deemed to have been concluded. Nevertheless, the parties usually exchange formal contracts for the sale and purchase of land at the agreed price, as they would in an ordinary transfer. As another way to use a put option as a hedge if the investor in the previous example already owns 100 shares of ABC Company, this position would be called a married put and could serve as a hedge against a drop in the share price. There will be resistance from owners who might consider this form of documentation as complex. Often, additional time is also required to negotiate the terms of the option agreement. A put option has intrinsic value if the underlying instrument had a spot price (S) lower than the exercise price (K) of the option. When exercised, a put option is valued at K-S if it is “in the money”, otherwise its value is zero. Before exercising, an option has a time value that is outside its intrinsic value. The following factors reduce the time value of a call option: shorten the expiration time, decrease the volatility of the underlying asset, and increase interest rates. Option pricing is a central issue in financial mathematics.

Whether or not you intend to resell the property, it is often a good strategy to give yourself the opportunity to do so as another exit strategy. Changing circumstances and flexibility always help you cope with these changes. Puts can also be combined with other derivatives as part of more complex investment strategies and can be particularly useful for hedging. Holding a European put option is equivalent to holding the corresponding call option and selling a corresponding futures contract. This equivalence is called “put-call parity”. Option agreements may set time limits within which a party may exercise its option, or alternatively, option periods may be triggered by certain events (e.g. B when the purchaser receives a development permit). Options are created through written agreements. As a rule, only one call option is granted. Sometimes a put option is also created by the same agreement, so each party can force the other to complete the sale and purchase of the property. The author receives a bonus from the buyer. When the buyer exercises his option, the author buys the share at the exercise price.

If the buyer does not exercise his option, the benefit of the author is the premium. The information provided in this article is for general information and educational purposes in aggregate form on legal topics that are topical at the time of its publication. The Content does not constitute legal advice or recommendation and should not be construed as such. Although every precaution has been taken in the preparation of this article, FC Lawyers cannot accept any responsibility for errors, including those caused by negligence, in the material. We make no representations, representations or warranties as to the accuracy or completeness of the information and you should not rely on them. It is recommended that you make your own independent requests regarding the accuracy of the information provided on this website. .