Types of Derivatives-Cont’d Options An option is a contract in which the option seller grants the option buyer the right to enter into a transaction with the seller to either buy or sell an underlying asset at a specified price on or before a specified date. Options, like other financial instruments, maybe traded either on an organized exchange or in the over-the-counter (OTC) market. The specified price is called the strike price or exercise price and the specified date is called the expiration date. The option seller grants this right in exchange fora certain amount of money called the option premium or option price. The option seller is also known as the option writer, while the option buyer is the option holder. The asset that is the subject of the option is called the underlying. The underlying can bean individual stock, a stock index, a bond, or even another derivative instrument such as a futures contract. The option writer can grant the option holder one of two rights. If the right is to purchase the underlying, the option is ab call option. If the right is to sell the underlying, the option is ab put option.
