CTA09/S580

What is an option?

Beyond making it clear that ‘option’ includes a warrant, S580 does not define option, and the word must be understood in its normal market meaning.

Under an option, one of the parties to the contract must be able to exercise a choice. In the case of a call option the option holder has the choice to purchase an asset from the counterparty. In the case of a put option the holder has the choice whether or not to sell the asset to the counterparty. The holder will only exercise the option if it is financially advantageous to do so. Otherwise the holder would let the option lapse, incurring the maximum possible loss, being the cost of the option.

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