Making sense of the world is, if I’m being honest, proving to be a little tricky at the moment. We seem to have reached a point where the accepted norms of political life and global relations have taken a decided lurch towards what could only be described as the bizarre. As I write, the global car industry is coming to terms with the impact of a 25% tariff imposed by the United States on foreign vehicle imports. This comes on top of some of the other tariffs that have already been introduced, although give it another 48 hours, and I wouldn’t be completely surprised if the situation changes again.
I had lunch with an ex-developer friend the other day who was rueing the current global political situation’s impact on his stock portfolio. He told me, in some detail, about his hedging strategy. This involved trading stock options, something he had recently become extremely passionate about. Now, for those of you who aren’t familiar with the nuts and bolts of options trading, let me just say that you’ve frankly dodged a bullet. I was a good two-thirds of the way through the tiramisu by the time my friend paused for breath, and I still didn’t really have much of a clue why selling (or was it buying?) options was such a nifty idea. But to be fair to him, he seemed very pleased with his strategy, and I did my best to mask my ignorance by nodding knowingly between mouthfuls, a trick I’d mastered during the formative years of my marriage.
But having a choice is generally a good thing, and luckily for us property bods, options aren’t exclusively limited to the realm of the stock market; they’ve also proved to be a valuable tool in the world of property. And by a stroke of luck, they’re not nearly as tricky as the stock market variety when it comes to wrapping your head around how they work. And although they’ve been a feature of the landscape for many years now, I’ve noticed there’s been a lot of talk about them recently, so it might be useful to share some thoughts on how they impact the world of property development.
Perhaps I should start by addressing the question, ‘What exactly is an option?’. In essence, an option gives the option holder the right, but not the obligation, to do something. And in the case of property, that ‘something’ is usually the option to buy a building or a piece of land. There are usually three other factors involved. The first is time, namely, for how long will the option be valid?
Options don’t usually run indefinitely, so there will be an expiration date at some point in the future. The second factor is a consideration; in other words, how much money will the option buyer pay to the seller for that right? Depending on the circumstances, this can vary from a nominal £1 to tens of thousands of pounds. The third factor is any parameter(s) to which the option is subject. In other words, what criteria need to be satisfied before the option can be exercised?
