Swaption

A swaption is an option granting its owner the right but not the obligation to enter into a fundamental swap. Although options can be traded on a diversity of swaps, the term "swaption" typically refers to options on interest rate swaps.

There are two types of swaption contracts:

A payer swaption gives the owner of the swaption the right to come into a swap where they pay the fixed leg and obtain the floating leg.
A receiver swaption gives the owner of the swaption the right to enter into a swap where they will receive the fixed leg, and pay the floating leg.
The buyer and seller of the swaption agree on:

The premium (price) of the swaption
the strike rate (equal to the fixed rate of the underlying swap)
Length of the option period (which frequently ends two business days prior to the start date of the underlying swap),
the term of the underlying swap,
Notional amount,
Amortization, if any
Frequency of settlement payments on the underlying swap.