CG12300 - Options: definition
An option may be defined as a right, binding in law, to accept or reject a present offer within a specified time in the future. An option is only binding under English law if acquired under a contract for consideration, or if granted in a deed.
An option is an agreement between the grantor, or writer, and the grantee. Typically, the grantor gives the grantee the right to buy or to sell a specified quantity of something such as shares, currency, or land at a price fixed by the option agreement. This right can only be exercised during a specific period or on a specific day. If dealing at arm’s length the grantee will commonly pay the grantor a premium for granting the option. The grantee is not obliged to exercise the option.
In considering the taxation treatment of options you should be aware of the following:
- Subject to any restrictions which may be imposed by the option as to the persons in whose favour assignment is permissible, the grantee of an option may normally assign an option to anyone.
- If an option is not exercised within the time or on the day specified, it simply expires.
- If an option is exercised, there will commonly then be a sale and purchase of the underlying asset that is the subject matter of the option. (See also CG12310 and CG12311.)
- Some options may, though, be cash-settled - that is, settled by a payment by the grantor of the option to the person exercising it. Although the terms of any option may allow, or require, cash settlement, you are most likely to come across this in options based on a financial index. Here there is no underlying asset and cash is therefore the only available method of settlement in these cases.
- Care should be taken to distinguish options from
- conditional and unconditional contracts, see CG14260+
- futures contracts , see CG56000+.
It is not uncommon to find such agreements described as options.