A derivative can be defined as a financial instrument whose value is derived from the value of underlying variables. Options contract is a derivative instrument which is traded both in Stock Exchanges and in the OTC market (over-the-counter market). An orderly and well defined market for Options Contract was established by the Chicago Board Options Exchange in 1973. Since then Option trading is carried out by all the major stock exchanges across the world.

There are two basic types of Options; ‘Call Option’ and ‘Put Option’. A Call Option gives its holder, the right to buy any underlying asset by a certain date and for a certain price; but the holder is not restricted by the obligation to exercise his Call Option. Whereas, the holder of a Put Option has the right to sell any underlying asset by a certain date for a certain price; but the holder is not bounded by the obligation to exercise his selling option.

The price in the Option contract is known as the ‘exercise price’ or the ‘strike price’ and the amount of money paid by an Option buyer is called as Option premium. There are two sides to every Option contract; on one side is the investor who has bought the Option and on the other side is the investor who has written the Option (taking a short position). The writer of an Option receives cash up front, from the buyer of the Option; but an Option writer has potential liabilities at a later stage. Option trading is mainly executed by various finance companies on Over-the-counter market, for their corporate clients.