DEFINITION of 'Buyer's Option'
In commercial contracts, an agreement between a vendor and a buyer that defines price and specifications over a specified time period for a product, but does not stipulate the quantity of the product that the buyer is obligated to purchase. In the auction industry, when multiple units of a product are being auctioned off, "buyer's option" refers to the right given to the winner of the auction of the first unit, to purchase any or all additional units at the winning bid price.
BREAKING DOWN 'Buyer's Option'
The buyer's option is advantageous to the buyer, who can choose to buy a greater or smaller quantity of product at a fixed price, depending on market conditions. However, it is detrimental to the manufacturer or supplier, since revenues from product sales cannot be estimated accurately. The manufacturer should, therefore, ensure that a supply agreement cannot be construed as a buyer's option contract. This can be achieved by simply specifying in the contract the fixed quantity of product that the buyer is obligated to buy.