How are option contracts created?

Option contracts are financial derivatives that give the buyer the right (but not the obligation) to buy or sell an underlying asset at a specified price within a certain time frame. These contracts are created through a process where a buyer and a seller come to an agreement.

Key components of option contracts:

• Call options: These give the buyer the right to buy the underlying asset at a specified price.
• Put options: These give the buyer the right to sell the underlying asset at a specified price.
• Premium: The buyer pays a premium to the seller for the option contract.
• Underlying asset: The asset that the option contract is based on.
• Expiration date: The date by which the option contract must be exercised.
• Strike price: The price at which the underlying asset can be bought or sold.

Process of contract creation:

Once the buyer and seller agree on the terms, the contract is created. The buyer pays the premium to the seller, and the terms of the option contract (strike price, expiration date, etc.) are specified in writing.

Option contracts are widely used in options trading as versatile financial instruments that can be employed in various investment strategies to hedge risk or speculate on market movements.