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There are two different kind of options. They are:
1. Call Options: Call option is option contract when buyer of the contract has right to buy the security at contract price (Strike price) any time on or before option expiry date(Contract period). Call option seller (Writer) is legally bound to sell the stock any time during contract period.
Buyer buys call option when they anticipate the underlier price to go up before expiry date. Depending on the price rise, buyer makes money.
In the example, buyer buys call option and in the event of price rise buyer makes huge profit. Refer to scenario 4 below.
2. Put Options: Put option is option contract where the buyer (holder) of the option has right to sell the security at strike price any time on or before option expiry date(Contract period).
Put option writer (seller) is obliged to buy the stock if put buyer decides to buy one.
Buyer buys put option when they anticipate the underlier price to fall before expiry date. Depending on the price rise, buyer makes money. Buying put option insures against sudden fall for price of an asset.
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