# Call & Put

##### ðŸ’¡ Welcome to Basic Options Strategies!

In this article, you'll learn about the applications, payoff structures, and drawbacks of Call and Put options!

### Defining Call Options

A call option is a financial derivative that grants the option holder the right, but not the obligation, to **buy **a specified underlying asset at a predetermined price (known as the strike price) and time (the expiration date).

### Defining Put Options

A put option is a financial derivative that bestows the holder with the right, but not the obligation, to **sell **a specified underlying asset at a predetermined price (known as the strike price) and time (the expiration date).

**Call Option**: Gives you the right to **purchase** an asset like ETH at a specified strike price and expiration date.

**Put Option: **Gives you the right to **sell **an asset like ETH at a specified strike price and expiration date.

### Applications of Call & Put Options

Although the specific use cases and potential strategies for options are broad, they can be boiled down into two main applications: speculation & hedging.

### Speculation

**Call options:**If a trader expects the asset's price to rise, they can purchase call options to potentially profit from the anticipated upward movement.**Put options:**If a trader expects the asset's price to fall, they can purchase put options to potentially profit from the anticipated downward movement.

### Hedging

**Call options:**Investors can utilize call options as a hedging tool to safeguard their existing short positions in the underlying asset.**Put options:**Investors can utilize put options as a risk management tool to safeguard their existing holdings in the underlying asset.

**Speculation: **A means to profit from price movements in the underlying asset.

**Hedging: **A means to offset potential losses in an existing position.

### Call & Put Option Payoff Structure

The payoff of both call & put options is contingent upon the price of the underlying asset at expiration. Let's look at how the payoff structure works for both at and after the expiration date:

### Calls at Expiration

- If the underlying asset's price falls below the strike price, the call option expires worthless, resulting in the buyer losing the premium paid.
- If the underlying asset's price surpasses the strike price, the option holder can exercise the option and realize a profit from the price difference (subtracting the premium paid and any transaction costs).

### Calls Before Expiration

Call options can be traded or closed out prior to expiration, enabling traders to capture profits or minimize losses based on fluctuations in the underlying asset's price and prevailing market conditions.

### Puts at Expiration

- If the underlying asset's price exceeds the strike price, the put option expires worthless, resulting in the buyer losing the premium paid.
- If the underlying asset's price falls below the strike price, the option holder can exercise the option and realize a profit from the price difference (subtracting the premium paid and any transaction costs).

### Puts Before Expiration

Put options can be traded or closed out prior to expiration, enabling traders to capture profits or minimize losses based on fluctuations in the underlying asset's price and prevailing market conditions.

### Drawbacks of Call & Put Options

**Time Constraint: **Options have a limited lifespan, as they come with an expiration date. If the underlying asset's price fails to move as expected within the designated timeframe, the option may lose value rapidly.

**Necessary Price Movement: **In order to profit from options, the underlying asset's price must surpass (calls) or fall below (puts) the strike price by a margin greater than the premium paid. If the asset's price does not move substantially, the option may not yield a profit.

**Loss Risk: **As an option buyer, you risk forfeiting the premium paid if the option expires worthless or if the underlying asset's price fails to reach the anticipated level. It is crucial to manage risk and invest only what you can afford to lose.

###### Test Yourself!

What is the maximum potential loss from purchasing an option?

The difference between strike price and underlying asset price.

The maximum loss varies, as it is designated by the option Delta.

The premiums paid.