What are option contracts? Understanding option contracts in 2 minutes

Options are a type of derivative instrument. They are a derivative because the price of an option is intrinsically linked to the price of underlying asset. Options are contracts that grant the right, but not the obligation to buy or sell an underlying asset at a set price on or before a certain date. Forward contracts are made with an intention of hedging future risk. But, if the forward contract is not beneficial with respect to the rates prevailing in the market, the person who entered into the contract has an option to recede and withdraw from it. Such an option available to the person who opt to withdraw is option contract in simple terms. It gives an option to move out of the contract. People who buy options are referred to as the holders and people who sell options are referred to as the writers. These contracts are normally entered upon an agreed amount between the holder and the writer. This amount is the option premium.