An option contract is an example of a financial agreement that allows the holder to purchase or sell an underlying asset at a predetermined price within a specific period. The asset could be a stock, currency, commodity, or any other financial instrument.

In simple terms, an option contract gives the buyer the right, but not the obligation, to buy or sell the underlying asset at a specified price, known as the strike price. The buyer pays a premium to the seller for this right. If the buyer exercises the option, the seller is obligated to sell or buy the asset at the agreed strike price.

There are two types of option contracts: call options and put options. A call option gives the buyer the right to buy the underlying asset at the strike price before the expiration date. A put option gives the buyer the right to sell the underlying asset at the strike price.

Option contracts are popular among investors and traders because they offer a flexible and low-risk way to invest in the financial markets. For example, a call option allows an investor to participate in the upside potential of a stock without actually owning the stock. If the stock price increases, the investor can exercise the option and earn a profit. However, if the stock price decreases, the investor can let the option expire and only lose the premium paid.

Option contracts are also used for hedging purposes, where investors use them to protect their portfolios against market volatility or potential losses.

In conclusion, an option contract is an example of a financial instrument that allows the holder to purchase or sell an underlying asset at a predetermined price within a specific period. It offers investors a flexible and low-risk way to invest in the financial markets and can be used for hedging purposes to protect portfolios against potential losses. It is important to understand the risks and benefits of option contracts before investing in them.