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I'd like to make a contract with my associate to buy something from them at a future time. In the financial world, options like these (for stocks and commodities) are traded all the time. I'm looking for something very similar, but because the thing I'm trading is not a traditional financial instrument, I won't be going through a broker.

Where can I find some reference material for how to write such a contract with proper legal language? The purchase is also very small so I would rather not hire a specialized lawyer just for this, as the lawyer's fee would be many times more than the purchase amount.

You can assume I have read https://law.stackexchange.com/a/6264/19001. I am still asking this, because I am wondering specifically about appropriate language for an option contract, pertaining to:

  • Timing (expiration, early exercise, European vs. American style)
  • Responsibility (how to specify which person has right to exercise, is it possible to make exercise mandatory)
  • How exactly the article to be traded must or can be described (for example commodities specify a baseline quality for the commodity)
  • Whether the price of the contract is specified in the contract
  • How to proscribe automatically voiding the contract in certain situations (such as if exercise becomes impossible)

To be clear about my situation, I'm actually planning something similar to a covered call. However, it might be nice if I could set it up so that at expiration, the contract MUST be exercised unless certain conditions are met, while before expiration it MAY be exercised if the relevant party wishes. The subject of the contract would also be a unique item rather than a commodity, so it would be nice if exercise could be satisfied by trade of only that specific item rather than any item of the like kind.

The goal here is that:

  • It's detailed enough that we're unknowingly assuming legal risk because it doesn't cover some weird corner case
  • It's not so complicated that we're unknowingly assuming legal risk because we can't understand it
  • That I do not have legal ownership of the item until such time as I choose to officially exercise the contract
  • Why can't you just set the delivery date to the future? – Putvi Apr 30 at 21:38
  • "do not have legal ownership of the item until such time" precludes immediate sale and delayed delivery. – user6726 Apr 30 at 22:42
  • @user6726 To be sure, Putvi's comment was before my edit, that's what made me realize I should clarify. However, it does deal with early exercise, since I can simply say the sale can happen at any time before expiration, but delivery must under no circumstances be much after expiration. Then if we wish to exercise the contract early, I could just buy it from him and he could (if he chooses) deliver it far in advance of the time he is required to. So it might make the wording a bit simpler. – Consis Apr 30 at 22:59
  • Is this “something” a financial asset or something else? – Dale M May 1 at 2:27
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How to write a contract for a future purchase

I am not encouraging you to consult a lawyer. However, your question is unclear and at times contradictory, whence first you need to have a very clear picture of what trading you envision and its terms & conditions. Without that, it is hard to give you much in the sense of starting points.

For instance, you start by saying you intend "to buy something from them". This means that you envision to get a long position on an option (meaning the financial derivative). But your last paragraph reads that "the contract MUST be exercised", which strikes the discretionality that someone with a long position on options has in regard to exercising that option. An "option" that must be exercised is a future or forward contract rather than an option. The notion of "compulsory option" makes no sense and it renders the contract altogether confusing.

Using "legal language" is not so important. What matters is that the contract be unambiguous so that a reasonable person can know the intent and conditions of the contract just from reading it (that is, without having to resort to other records or sources). Thus, the terminology of European vs. American is acceptable, since it is pretty standard for anyone with an elementary knowledge of options. By contrast, if you want "trade of only that specific item rather than any item of the like kind", that needs to be made clear in the contract. As an example, the mid portion of this page reflects the minimum standards that the delivery of underlying asset (in this case, cotton) must meet.

Also, specifying the type of exercise (European vs. American) is a more robust approach than just assuming that "if it says "delivery by date X" I guess the early exercise is irrelevant". In contract law there is the doctrine of contra proferentem, which could drastically alter the meaning of who decides when delivery shall take place.

As to "which person has the right to exercise", that is obvious from the fact that the buyer is acquiring a right by paying some amount to the writer of that option.

If you are interested in reading court opinions addressing options and financial derivatives, check the results of this query and modify it in accordance with the specs you have in mind.

  • Thanks for your answer which explains some very important points! Thanks for pointing me to leagle also, I'll definitely check it out and see if similar cases have happened. But to clarify regarding right of exercise: You are correct for traditional options. But if I'm writing my own, then I could easily give both parties or neither the unilateral right to exercise, isn't that so? It wouldn't be a traditional option then, but I think it would still be a legally permissible contract. – Consis Apr 30 at 22:48
  • @Consis Being legally permissible (which it is) does not necessarily mean it will have the legal effect(s) you intend. Something unclear to me is why someone would buy an option of which exercise can depend on its writer's unilateral discretion. I am mindful that your question is in terms of "certain conditions [being] met", but this or other unspecified details might be crucial in determining whether the contract reflects what you envision. – Iñaki Viggers May 1 at 10:48
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You would just write that it will be delivered on a future date or just simply wait until the future time and have it delivered then, but pay now.

  • Well, if the contract is for 5 years, but then we decide that 1 year later I'll just buy the thing early, I don't want to now be locked out of that because the contract says "must be delivered in 2024". The other thing is, in finance you can just buy back the contracts "to close", thus in effect annulling them, but I'm not sure how that is actually phrased in the document. Or is that basically like offering to pay someone $X to agree to void the contract? – Consis Apr 30 at 21:50
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    Financial contracts give you the right to buy something at a price, not just whenever. I mean just write in that it must be delivered by date x if you maybe want it sooner. – Putvi Apr 30 at 21:53
  • Ah, if it says "delivery by date X" I guess the early exercise is irrelevant - good point. – Consis Apr 30 at 21:58
  • Just use whatever fits your situation my friend. – Putvi Apr 30 at 21:59
  • Do you want the "option" itself to be transferable? If not, you might be complicating things by using the option concept. A simple contract - for a payment now of $A the other person promises to sell you item X for price Y anytime between now and date Z. If it fits the situation, you promise to buy on day Z at the latest. – George White Apr 30 at 22:04

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