Patents can be characterized as options. Specifically, patents can be thought of as call options, consisting of the right, at various stages, to purchase a stream of expected cash flows associated with excluding others from developing patented subject matter. Patent holders can monetize this right by developing and commercializing the patent and/or by litigating, or threatening to litigate, the patent.

The insight that patents are options is important to patent valuation and policy. First, because patents are options, patent holders receive the full value associated with the right to exploit the underlying subject matter immediately upon issuance. Moreover, this value is transferred to the patent holder from society, which collectively would otherwise retain the option. Just as a company transfers value from shareholders to executives when it issues stock options, so too does the Patent and Trademark Office (PTO) transfer value from the collective to patent holders when it issues patents. Further, the value of patents, like the value of stock options, is positive when they are granted, even if they turn out to be worthless at a future date.