What are the Key Terms in a Call Option Agreement?

As a business owner, you may wish to familiarise yourself with call options. A Call Options Agreement (COA) is an excellent way for individuals and businesses to speculate on how well your business will do. Additionally, if your business offers an investment service, you may want to use stock options yourself. This article will explain a call option agreement and explore five key terms to look out for in a call option agreement. 

What is a Call Option Agreement?

A call option agreement is a type of contract involving a call option holder and an option seller. The option holder has the right to buy a set number of shares in a company at a specific price (the ‘strike price’) before an expiration date. Next, the option buyer will also typically have to pay a premium to the seller. Additionally, the option premium is a set price that the parties agree to in the contract.

The option holder will lose their right to use the options contract on the option expiration date. Notably, the option holder has a ‘right’ and not an ‘obligation’. This means that the option holder can effectively choose whether to buy the shares at a price or not. 

A call option agreement can be a good way for investors to make money on a share with fewer risks. Since the buyer can choose to buy the option, they can elect not to if the share does not reach a profitable price. As a result, the buyer’s only loss is the option premium rather than the implied volatility of buying the share outright. Similarly, the option seller can make money because of the premium that they receive. In some cases, businesses can also use options to avoid potential risks in certain investments. 

What Are the Key Terms of a Call Option Agreement?

If you are entering into a call option agreement, you should look to negotiate some of the critical terms of the agreement. Some key terms include:

1. The Parties to the Agreement

Naturally, your contract will have to include the identity of the parties to the contract. In the formal document, you may often find this under the ‘grantor’ and ‘grantee’. Additionally, this is important for outlining the specific person who has the right as part of the options contract.

2. The Option Shares

The agreement should outline the exact scope of the shares. This includes the number of shares and the company to whom those shares belong. 

In this respect, your option could cover two types of shares. However, it could also cover shares that a company has yet to issue, which will mean that your agreement is a call option to subscribe for shares. Or it could be over shares that already exist, in which case you will have a call option to purchase shares. 

3. The Option Premium

An option premium is an amount that you pay the option seller to have the option in the first place. This price, and whether your contract will include it at all, will depend on who you are buying the options from. When a company sells options over its shares, it might choose not to include a premium. Alternatively, it may include only a nominal amount. 

However, if you are buying an option from a third party specialising in options trading, you may find yourself paying a significant option premium. 

4. Exercise Price

The exercise price is the fixed price of money you will pay for the shares. The seller will often disclose this price when agreeing. 

There may be no exercise price within the call option agreement in some cases. Instead, there may be conditions that the option holder has to satisfy to exercise their right. Ultimately, whether the seller will include an exercise price will depend on the nature of the relationship between the seller and the buyer of the options.

5. Expiration Date

The expiration date of the call option agreement is the last day that the option holder can exercise their right to purchase the shares. After this date, the option holder will lose their right as per the options contract. In some cases, the options seller may choose to define specific conditions. This may result in the expiry of the contract alongside picking a specific expiry date. 

You should look out for the key terms of your call options agreement and remember that you can always try to negotiate more favourable critical terms for you.

Key Takeaways

In short, you should be aware of trading options as a business owner. This can be an excellent way to: 

• raise money for your business; 
• hedge against potential risk; or 
• invest in another business. 

Additionally, some key terms to look out for include: 

• the parties to the agreement; 
• the option shares; 
• the option premium; 
• the exercise price; and 
• the expiration date. 

It would help to remember that you can always negotiate the key terms of this agreement, including the option’s price.

If you need help understanding or negotiating the key terms of your Call Option Agreement, our experienced contract lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 0808 196 8584 or visit our membership page.

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