An OPTION is a legal agreement to purchase something in the future — at a price determined when the option is exercised. The purpose of an option is to secure acquisition and provide price-protection.
Options can be settled in 3 ways:
1. Offset the option – reversing the original transaction prior to the exercise date.
2. Exercise the option – take possession of the asset.
3. (You may able to) cash-settle — for a smaller sum of money than the cost of taking possession.
The power of options is how their ability to adjust your position in your favor. If you use accounts receivables to purchase an option, and don’t complete the transaction, your accounts receivables will be lost.
