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Option trading gives an option to the trader to buy or sell a particular asset at a later date at a predetermined price. It’s a contract between two parties, i.e. buyer and seller for the business transaction regarding an asset. Either party is given an option to buy or sell a specified asset in at a future time at a price they have already agreed upon. Each party is under no obligation to transact the business deal however. Option trading can involve any sort of asset like property, shares of stock or bonds or some other securities and currency.

The option can be granted to either party; A call option gives the buyer the right to buy the underlying asset; a put option gives the seller (in that case buyer of the option) the right to sell the concerned asset. In return for granting the option, the seller of the option collects a payment (the premium) from the buyer. In case the buyer opts to exercise his right, the seller of the option, as per force of contract law, has to sell the agreed upon option to the buyer of the option at the predetermined price. The buyer of the option also has the right to let the option expire without availing it.

Every financial option is a contract between two parties with the terms of the option specified in term sheet. Most option contracts usually contain the following specifications:

• Who has the bought the option, does the option holder has the right to buy (call option) or the right to sell (put option).
• The nature, class, quantity, and amount of the pledged asset: or some other specifications which might be deemed necessary to be disclosed for the proper and right full execution of contract.
• The price which is supposed to be paid for the underlying asset as per the terms of the contract. This price is called strike price or also known as the exercise price, because at this price the opted transaction is supposed to be paid either just before the date of expiry or at the expiration date, which is the last date the option, can be exercised.
• The term sheet must mention the conditions and terms of the option.