What is an Option?

An option is a contract created between a buyer and seller of an asset, which gives the the holder of the asset in question the option, but not the obligation to purchase (or sell) the asset at a pre-determined price.

To create an option, the buyer and seller will decide on a period of time wherein the deal is available. The last day of this period is called the expiration date. They will also decide on a specified strike price. The strike price is the specified price at which the option can be exercised.

All options are derivative instruments, which means that their prices are derived from the underlying asset in question.

The strike price of the asset is key to options pricing. At the expiration date, the difference between the asset’s market price and the option’s strike price represents the amount of profit gained or lost if the option is exercised.

There are two common examples of options. One is called a call option and the other is a put option. Options are used to speculate and hedge against the risk of unknown events — similar to taking out insurance.

Firmo makes it possible for derivatives, such as options, to be securely deployed as smart contracts on the blockchain, removing many of the intermediaries currently involved in the creation of derivatives today.

This is done through FirmoLang, our formally verified, domain-specific language.