Quite simply, an option contract is a type of contract that protects an offeree from an offeror's ability to revoke the contract.
Consideration for the option contract is still required as it is still a form of contract. Typically, an offeree can provide consideration for the option contract by paying money for the contract or by rendering other performance or forbearance. See consideration for more information.
A problem arises with unilateral contracts because of the late formation of the contract. With classical unilateral contracts, a promisor can revoke his offer for the contract at any point prior to the promisee's complete performance. So, if a promisee provides 99% of the performance sought, the promisor could then revoke without any remedy for the promisee. The promisor has maximum protection and the promisee has maximum risk in this scenario.
An option contract can provide some security to the promisee in the above scenario. Essentially, once a promisee begins performance, an option contract is implicitly created between the promisor and the promisee. The option contract here is a bilateral contract; the promisor impliedly promises not to revoke the offer and the promisee impliedly promises to furnish complete performance. The consideration for this option contract is discussed in comment d of the above cited section. Basically, the consideration is provided by the promisee's beginning of performance.
Case law differs from jurisdiction to jurisdiction, but an option contract can either be implicitly created instantaneously at the beginning of performance (the Restatement view) or after some "substantial performance." Cook v. Coldwell Banker/Frank Laiben Realty Co., 967 S.W.2d 654 (Mo. App. 1998).
It has been hypothesized that option contracts could help allow free market roads to be constructed without resorting to eminent domain, as the road company could make option contracts with many landowners, and eventually consummate the purchase of parcels comprising the contiguous route needed to build the road.
The "buyer's option" contract in Illinois: recent Illinois and Seventh Circuit opinions have recognized a buyer's-option contract that obligates sellers to sell without also requiring buyers to buy. Sellers should review these rulings and take care not to create a buyer's option when they intend to create a binding purchase obligation.
Aug 01, 2008; [ILLUSTRATION OMITTED] Manufacturers and other vendors often enter into supply agreements with buyers in which the seller agrees...
CFTC STAFF ALLOWS SYDNEY FUTURES EXCHANGE'S 1-DAY OPTION CONTRACT BASED ON CBOT MINI-SIZED DOW FUTURES CONTRACT TO BE OFFERED, SOLD IN U.S.
Aug 14, 2006; The Commodity Futures Trading Commission issued the following press release: The Commodity Futures Trading Commission's (CFTC's)...