Option Markets and its concept

Option is a contract between two parties in which one party has the right but not the obligation to do something, usually to buy or sell some underlying asset. It is a contract issued by and individual, a corporation or an investment bank that that gives the buyers of such contract the right to buy or sell the securities at a particular price, known as strike or exercise price where the strike price is the fixed price in the option contract at which the holder can buy or sell the underlying asset is called the strike or exercise price, during a set of time in the future before an expiry date specified in the contract.

Notice that an option gives only a right, so that buyer can decide whether or not to exercise such a right. Having rights without obligations has financial value so option holders must purchase these rights, making them assets. These assets derive their value from some other asset, so they are called derivative assets. Generally each contract is for 100 shares of the stock and options are traded in whole number. There are two parties involved in the option contract. They are option buyer and option seller.

From the option buyer's viewpoint, options are assets because they embody a right to buy or sell an asset at a set price for a stated time. This right has value. From the option writer's viewpoint, options are contingent liabilities; they impose the obligation to sell or purchase a stated amount of a stated asset, at a stated price for a stated time that is contingent upon the choice made by the holder of the option. Because options are agreements with asset like characteristics, it costs something to enter into them. The cost of an option is termed the premium. This premium is paid by the buyer to the seller of the option who must compensate for the contingent liability that he/she is accepting.