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In the film industry, an option is a contractual agreement between a potential film producer (such as a movie studio, a production company, or an individual) and the author of source material, such as a book, play, screenplay, etc. 
The agreement details the exclusive rights, including the specified time period and financial obligations. The producer usually has to advance the essential elements, such as financing and talent, towards the creation of a film based on the work being optioned. Similarly, producers can also option articles, video games, songs, or any other conceivable works of intellectual property.
Subject of option
To be more specific, when a screenplay is optioned, the producer has not actually purchased the right to use the screenplay; he has simply purchased the "exclusive right" to purchase the screenplay at some point in the future, if he is successful in setting up a deal to actually film a movie based on the screenplay.
This is usually a slow process in which a "package" of sorts is created. During this time, the producer must:
- Get the screenplay written (if the option was on a book or other work, and not a screenplay);
- Obtain informal agreements with the director, the principal actors, and the financiers;
- Take it to a movie studio or other potential financier and potentially help with distribution (pre-sales);
- Finalize the screenplay to the agreement of all stakeholders—the exclusivity of the option allows this step without risk of a rival attempt to produce the same property.
This process can last for a prolonged period of time known as development hell. If all this tentative planning falls into place, meaning actual agreements are signed and financing is secured, then the producer can start the pre-production phase. A portion of the financing is usually used to exercise the option.
Film options are exclusive, usually for an initial period of 12–18 months. After the expiration date, the producer no longer has an exclusive right to buy the screenplay, and the writer can option it to a different producer. Most option agreements specify the prices of additional extensions (most commonly one extension, also for 12–18 months), should the producer be unable to put the movie together in the originally specified term, and choose to extend. The fee for the first option period is normally applicable to the option exercise price, while the fee for the extension (if exercised) typically is not applicable, though that is not always the case.
Options in Hollywood
Options are not expensive by the standards of Hollywood movies. For True Romance, Quentin Tarantino received US$50,000 to option his script. Many writers are happy to receive a few thousand dollars. Option contracts typically do specify the eventual cost of the screenplay, if the producer does end up exercising the option.
Since optioning a screenplay is far cheaper than buying it, options are very popular in Hollywood for speculative projects.
The above rules generally also apply to the option contract for a completed play between playwrights and theatrical producers. A significant difference is that the playwright may refuse to allow their product to be changed in any way without consent and involvement.
The option will provide for the provisions triggered by the purchase of the play when the producer has put his investors and money together. Occasionally, a play will be commissioned by a producing organization, and in that case the writer will not be working "on spec", and the notion of an option will not arise.
- Don Chance, Eric Hillebrand and Jimmy Hilliard (2009). Pricing options on film revenue, Risk 22, 80-86.
- S. Young, J. Gong, and W. Van der Stede (2012). Using real options to make decisions in the motion picture industry. Strategic finance . pp. 53-59.
- J. Gong, J. Jianxin, S. Young, and W. Van der Stede (2011). Real Options in the Motion Picture Industry: Evidence from Film Marketing and Sequels. Contemporary Accounting Research, Vol. 28, No. 5, pp. 1438-1466, Winter 2011.
- Reservoir Dogs: Lawrence Bender's Commentary on DVD Special Edition