Info 1: option contract definition
Info 2: how option contract works
Info 3: option contract vs future contract
Info 4: example of option contract
Opening information:
Option contract breaks into two words option and contract, option means choice, contract means agreement, and option contract means agreement which is made with choice.
So now let’s have a look at what is an option contract, how the option contract works in the public market among all investors and speculators, and what is the difference between an option contract and a future contract, finally one brief example of the option contract.
Info 1: option contract definition
Mr. Peter and Mr. Jason had a speculation often on the movie ticket price and box office, whenever a new popular movie could released into the cinema market.
Peter could bet on the any of prices of the ticket with a pre-determined box office If the pre-determined box office amount wouldn’t be reached based on the determination of the price tickets after the release based on the marked time frame.
Peter would lose the entire bet amount, and the other person Mr.Jason who provided the offer to bet on the pre-determined box office price at the marked time frame would earn the entire bet amount despite Peter.
On the other hand, Jason also provided him an offer to bet at the box office with a ticket in the marked time frame downtown, if the movie did not cross the determined amount, then Peter owned and Jason lost.
Here the deal of agreement between Peter and Jason is the contract with the choice to determine whether such a movie crossed the determined box office amount in the expected time or not.
This choice contract between the two people is what is known to be an option Contract, so let’s dive into how the option Contract works in the public market.
Info 2: how option contract works
Option contracts don’t represent any of the specific things or objects, instead, they are agreements with a choice to speculate on the price fluctuation of any kind of public Securities.
Therefore any agreement deal would happen between the two people to gamble the Securities market price in the rise and fall of certain securities, they its considered an option contract.
Suppose the agreement is not made between the two people to speculate the price fluctuation of the one specific security, instead if they purchased the real securities without a contract, then such an agreement is not named as an option contract.
The contract agreement is about does the price of one security would increase or fall in the pre-determined time frame, betting on any of the security prices means the speculator bets any of the two choices that are provided on the option market as Call and put.
If the speculators bet on the call choice, they agree to the contract in which the betting security price would increase in the pre-determined time frame, or if the same speculators bet on the put, they agree to the contract in which that betting security would decrease in the pre-determined time frame.
Based on the contract deal agreement that speculators choose to speculate on the price move or fluctuation at the determined time frame would provide the results at the end of the period in future market price, does the speculator’s profit at the option contract or not?
If the market price is at the opposite or against the best price in the market public securities at the end of the pre-determined time frame, it would be elaborate as a loss of the contract bet amount.
This is all about the options contract, but most people confuse the option Contract and future contract, so let’s jump into the key difference in it anyway.
Info 3: Option contract vs future contract
The difference between an option contract and a future contract are, option contract refers to the agreement made with a choice to purchase one real security in the end period of one time frame after the speculation.
On the other hand, future contracts also agreement but must need to purchase real security at the end of the time frame.
To make you more clear about the option contract, let’s look into one brief example below.
Info 4: example of option contract
Say you the traders who trade different contracts in the derivatives market, had bought one contract to purchase with the choice to speculate on the fall and increase the price of one security.
On the other hand, you had also purchased the contract to buy the security definitely at the end of the contract time frame.
Here the contract which is with a choice is considered an option contract, and then the contract that is bought with no choice or option is named as a future contract.