Below is the payoff diagram for a long-call position. On the other hand, the profits are theoretically unlimited as the price rises higher than $102. A short call is when a trader sells a call option. 102. If the asset price is below the strike price, the option holder will let the option expire, and losses are theoretically limited to the premium paid for the options. Profits are limited to the premium collected when the strike price exceeds the asset price and the calls are allowed to lapse. Above the strike price are theoretically increasing losses as the asset price increases. A long put is when a trader buys a put option, typically used when bearish on the underlying asset.

Exercising means utilising the right to buy (for holder of a call option) or sell (for holder of a put option) the underlying asset. Usually, an option contract includes whether the option holder has the right to buy (a call option) or the right to sell (a put option). Call options and put options are the two main types of options. Examples of underlying assets include a stock, bond, foreign currency, commodity, or cryptocurrency.

An option can also be categorised as American or European style. Aside from providing traders with the right to buy or sell underlying assets, there are various use cases for options. The advantage of options is that profits are not limited to only when the market rises. May fluctuate based on market conditions. If selling an option, the premium is the amount received. American options can be exercised at any time before the expiration date of the option, while European options can only be exercised on the expiration date. When buying an option, the purchase price is called the premium. The premium isn’t fixed. Because of the versatile nature of options, profits can also be made when the market lowers (typically by buying a put option) or even moves sideways.

Example: A trader purchases a call option at the $95 strike price for XYZ that is currently trading at $100. The trader’s position is ITM by $5. For put options, ITM means the strike price is above the actual price. The call option gives the trader the right to buy XYZ at $95. Example: A trader purchases a put option at the $110 strike price for XYZ that is currently trading at $100.