An option contract is a legal agreement between two parties – the buyer (holder) and the seller (writer) – that gives the buyer the right, but not the obligation, to either buy or sell an asset at a certain price (exercise price) on or before a predetermined date (expiration date). Option contracts are a type of derivative security, meaning their value is derived from the underlying asset, such as stocks, commodities, or foreign currencies. The advantages of trading option contracts include flexibility and leverage, as well as potential for higher returns when compared to other forms of investing.