When it comes to investing, option contracts are a common term you might come across. They are a type of financial derivative that allows the holder to buy or sell an underlying asset at a predetermined price, known as the strike price, within a specified time period.

Options contracts are used by traders and investors to hedge their investments against potential market volatility. They can also be used to speculate on the price movements of an underlying asset.

There are two types of option contracts: call options and put options. A call option gives the holder the right, but not the obligation, to buy the underlying asset at the strike price. On the other hand, a put option gives the holder the right, but not the obligation, to sell the underlying asset at the strike price.

For example, suppose an investor buys a call option for 100 shares of Company X at a strike price of $50 per share. If the price of Company X`s shares rises above $50, the investor can exercise the option and buy the shares at the lower strike price, then sell them on the market at the higher price, making a profit. If the price of Company X`s shares falls below $50, the investor can choose not to exercise the option and let it expire.

Options contracts are traded on exchanges such as the Chicago Board Options Exchange (CBOE) and the International Securities Exchange (ISE). They are standardized contracts that have a specific expiration date and underlying asset. The option`s price, known as the premium, is determined by several factors, including the price of the underlying asset, the strike price, the time remaining until expiration, and the volatility of the market.

In summary, option contracts are a type of financial derivative that provides investors with flexibility and risk management strategies in the market. Understanding the financial definition of option contracts is crucial for anyone interested in investing or trading in the options market.