For this reason, an option is a contract that gives a buyer the right (choice) without an obligation to buy or sell an underlying instrument (specified asset) at the exercise price (specified price) until maturity of contract (specified time).

On the other hand, a seller has an obligation to sell or buy the underlying instrument only if exercised by the buyer.

This obligation is known legally as a contingent liability as it is only effective or becomes enforceable if the buyer exercises his right to buy or to sell.

To have a fair trading, for a buyer to acquire the "right", he is required today to pay a certain sum of non-refundable money known as a premium, while the seller will receive it in order to impose a contingent liability in the contract.

Therefore, a premium as the name may suggest, is an "extra" money which represents a cash-outflow (expense) to the buyer but a cash-inflow (income) to the seller.