Option Contract

In financial derivatives, an option contract is an agreement that gives the option holder the
right to buy or sell the underlying asset at a certain date at a pre-determined price , where a
seller or buyer of the option has no choice but obligated to deliver or buy the underlying asset
if the option is exercised.
Features of an option contract
Premium or down payment
The holder of this type of contract must pay a certain amount called the ‘premium’ for having
the right to exercise an options trade. In case the holder does not exercise she/he loses the
premium amount. Usually, the premium is deducted from the total payoff, and the investor
receives the balance.
Strike price 
This refers to the rate at which the owner of the option can buy or sell the underlying security
if she/he decides to exercise the contract. The strike price is fixed and does not change
during the entire period of the validity of the contract. It is important to remember that the
strike price is different from the market price.
Contract size 
The contract size is the deliverable quantity of an underlying asset in an options contract.
These quantities are fixed for an asset. If the contract is for 100 shares, then when a holder
exercises one option contract, there will be a buying or selling of 100 shares.
Expiration date 
Every contract comes with a defined expiry date. This remains unchanged until the validity of
the contract. If the option is not exercised within this date, it expires.
Intrinsic value
 An intrinsic value is the strike price minus the current price of the underlying security.
Money call options have an intrinsic value.
Settlement of an option 
There is no buying, selling or exchange of securities when an options contract is written. The
contract is settled when the holder exercises his/her right to trade. In case the holder does not
exercise his/her right till maturity, the contract will lapse on its own, and no settlement will
be required.
No obligation to buy or sell
 In case of option contracts, the investor has the option to buy or sell the underlying asset by
the expiration date. But he is under no obligation to purchase or sell.
Types of option contracts
Call option
A call option is a type of options contract which gives the owner the right, but not the
obligation to buy a security or any financial instrument at a specified price ( strike price of
the option) within a specified time frame.
To buy a call option one needs to pay the price in the form of an option premium. the option
The seller, on the other hand, is obliged to sell the securities that the buyer desires. In a call
option, the losses are limited to the options premium, while the profits can be unlimited.
Put option
Put options give the option holder the right to sell an underlying security at a specific strike
price within the expiration date. This lets investors lock a minimum price for selling a certain
security. Here too the option holder is under no obligation to exercise the right. In case the
market price is higher than the strike price, he can sell the security at the market price and not
exercise the option
Straddle Strategy
There is another options strategy known as the straddle. This strategy is used by an investor
when the price movement of the stock is fluctuating. The straddle option consists of two
options contracts, a call option and a put option. both the call and the put options have the
same expiration date and the same strike price. As we have seen the call option gives you the
right to buy the stock at a set strike price any time before the expiration date. The put option
gives you the right to sell the stock at the same strike rate before the date of expiration. You
would need to pay the premium to buy both these options . However, the investor bets that
the value of that option will give him enough profits to make up for the option premiums he
has paid.
Let’s see a commodity derivatives , from the National Stock Exchange