Options take many forms. If you own a house or have automobile insurance, you have already dealt with the basic forms of options in your everyday life. However, in the listed options world there are only two kinds of options, Calls and Puts.

A call option is a financial contract between two parties, the buyer and the seller. The buyer of the option has the right, but not the obligation to buy an agreed quantity of a particular commodity (called the underlying asset) from the seller of the option at a certain time (the expiration date) for a certain price (the strike price). The seller (or “writer”) is obligated to sell the underlying asset should the buyer so decide to make the purchase. The buyer pays a fee (called a premium) for this right.

The buyer of a call option wants the price of the underlying asset to rise in the future; the seller either expects that it will not, or is willing to give up some of the upside (profit) from a price rise in return for the premium (paid immediately) and retaining the opportunity to make a gain up to the strike price (see below for examples).

The initial transaction in this context (buying/selling a call option) is not the supplying of a physical or financial asset (the underlying asset). Rather it is the granting of the right to buy the underlying asset, in exchange for a fee - the option price or premium.

A put option is a financial contract between two parties, the buyer and the writer (seller). The put allows the buyer the right but not the obligation to sell a commodity or financial instrument (underlying asset) to the writer (seller) of the option at a certain time for a certain price (the strike price). The writer (seller) has the obligation to purchase the underlying asset at that strike price, if the buyer exercises the option.

Note that the writer of the put option is agreeing to buy the underlying asset if the buyer exercises the option. In exchange for having this option, the buyer pays the writer (seller) a fee (the premium). (Note: Although option writers are frequently referred to as sellers, because they initially sell the option that they create. 

The put buyer either believes it’s likely the price of the underlying asset will fall by the exercise date, or hopes to protect a long position in the asset. The advantage of buying a put over shorting the asset is that the risk is limited to the premium.

The naked or uncovered put writer does not want the price of the underlying asset is likely to fall.  The writer sells the put to collect the premium and hopes the underlying asset goes up.