Question

A sent B a letter stating "You have a 30-day option in which to purchase my car for $2,000." Twenty-five days later, B tendered $2,000 to A and informed him that he exercised the option. A claimed that he could not exercise the option because the option was not binding as A had not received anything for it. Was A correct?

Answer 1

Options are recognized as contracts which provide its holders the right but not any obligation to buy or sell an underlying asset on or before a specified date at a predetermined price. The buyer of the option must pay the option premium fully at the time of entering into the contract such as to enjoy the right to buy or sell the underlying asset at a specified price on or before the expiration date of the option. The letter sent by A to B only stated about the 30 day period within which B has the option of purchasing his car for $2,000 but is silent about any option premium. An options contract is valid in legal terms only when the buyer pays the option premium to the seller at the time of entering into the contract. As there is no payment of any option premium by B to A, the option contract is not valid as there is no formation of any contract. Hence, A is not obliged to exercise the option as the same is not binding on him.