Definition of an "Option Agreement"

Formation

• An option contract is formed the same as other contracts. Parties to the contract must first agree to all the terms and conditions held within. Both parties must also "give consideration" to make the contract valid. This means each side must provide something of value to make the contract binding (work, money, property, etc.).
  
  

Distinguishing Characteristic

• The distinguishing characteristic of an option contract is the promise to hold an offer open for a period of time. For example, if your neighbor offers to sell you a car, you can enter an option contract to keep the offer open for 10 days. Without an option contract, your neighbor is not obligated to keep the offer open. You can accept or decline the offer within that period.
  
  

Termination

• An option contract ends after the specified time period expires (on the 11th day, in the above example). The contract also can end with a new option agreement between the parties. (You can create a new option contract to supersede the old one.)