Buyer's Option

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.

RELATED TERMS
  1. Reverse Auction

    A type of auction in which sellers bid for the prices at which ...
  2. Auction

    A system where potential buyers place competitive bids on assets ...
  3. Call Auction

    Where participants buy or sell units of a good. At a call auction, ...
  4. Reserve Price

    A minimum dollar amount that the owner of an item up for auction ...
  5. Auction Rate

    The interest rate that will be paid on a specific security as ...
  6. Auction House

    A company that facilitates the buying and selling of assets, ...
Related Articles
  1. Personal Finance

    Should You Buy A House At Auction?

    The traditional real estate market isn't the only place to conduct your home search. Auctions also bring many buying opportunities.
  2. Personal Finance

    Should You Buy A House At Auction?

    In theory, many of the best properties are auctioned. But auctioned properties aren’t always hidden gems.
  3. Investing

    Auction Rate Securities: Bidding On The Long Run

    These investments do better with a long-term horizon. Should you buy them before they're going, going, gone?
  4. Personal Finance

    eBay vs. DealDash: Comparing Auction Sites (EBAY, PYPL)

    Learn how the bidding process works at DealDash and eBay, and discover the potential pitfalls when making bids at these auction sites.
  5. Personal Finance

    Rent-To-Own Homes: How The Process Works

    A rent-to-own agreement can benefit homebuyers with bad credit or insufficient funds for a down payment. Here’s how one works.
  6. Personal Finance

    Rent-To-Own Homes: How The Process Works

    Here's what to watch for when negotiating a contract for a rent-to-own home – and who is a good candidate for this option.
  7. Markets

    Explaining Dutch Auction

    A Dutch auction is a public offering auction.
  8. Trading

    What's The Difference Between Options And Futures?

    An option gives the buyer the right, but not the obligation, to buy or sell a certain asset at a set price during the life of the contract. A futures contract gives the buyer the obligation to ...
  9. Investing

    Options on Futures

    Options on futures contracts offer another way for day traders to use options. These are traded on the same exchange as the underlying futures contract. Traders should take care to understand ...
  10. Entrepreneurship & Small Business

    3 Reasons To Buy Government Surplus for Your Small Business

    Learn why it's wise to access government surplus auctions to buy furnishings, equipment and other items to start a new business or expand an existing business.
RELATED FAQS
  1. What is the difference between an options contract and a futures contract?

    Both futures and options trading are considered advanced forms of market trading, and require additional training or the ... Read Answer >>
  2. Does the buyer or the seller control a call option?

    Buy call options and maintain control over the price you pay and when to buy a given stock. Learn how to maintain control ... Read Answer >>
  3. What is the difference between options and futures?

    The main fundamental difference between options and futures lies in the obligations they put on their buyers and sellers. ... Read Answer >>
  4. What does the underlying of a derivative refer to?

    Find out more about derivative securities, what an underlying asset is and what the underlying assets refer to in stock options ... Read Answer >>
  5. What's the difference between a letter of credit and a bank guarantee?

    Learn how letters of credit and bank guarantees differ, how they are used by banks and companies, and how buyers apply to ... Read Answer >>
  6. What are the differences between Ex Works (EXW) and Free On Board (FOB)?

    Learn about Ex Works and Free on Board, the main difference between these Incoterms, and the responsibilities of buyers and ... Read Answer >>
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center