A put option refers to the right given to the contract to sell the underlying asset at a price agreed upon by both parties to the transaction at a specific period in the future.

A call option refers to the right to purchase a certain amount of the underlying object at the execution price within the validity period of the option contract;

According to the execution time, options can be divided into two main types : European options and American options. European options refer to options that are only allowed to be executed on the expiration date of the contract. They are used in most over-the-counter transactions. American options refer to options that can be executed on any day during the validity period after their establishment. They are mostly used on exchanges.

Examples

1) Call options: On January 1, the underlying material is copper futures, and its option execution price is US$1,850/ton. A buys the right and pays $5; B sells the right and earns $5. On February 1, the price of copper futures rose to US$1,905/ton, and the price of call options rose to US$55. A can adopt two strategies:

Exercise the right - A has the right to buy copper futures from B at a price of US$1,850/ton; B must satisfy A's request to exercise the option , even if B does not have copper in hand, he can only buy it in the futures market at the market price of US$1,905/ton and sell it to A at the execution price of US$1,850/ton, and A can sell it in the futures market at the market price of US$1,905/ton. Out, profit of $50. B loses $50.

Selling the right - A can sell the call option at a price of $55, and A makes a profit of $50 (55-5).

If the price of copper falls, that is, the market price of copper futures is lower than the final price of US$1,850/ton, A will give up this right and only lose US$5 in premium, while B will make a net profit of US$5.

(2) Put options: On January 1, the execution price of copper futures is 1,750 US dollars/ton. A buys this right and pays US$5; B sells this right and earns US$5. On February 1, copper prices fell to $1,695/ton, and the price of put options rose to $55. At this time, A can adopt two strategies: exercise the right - A can buy copper from the market at a market price of US$1,695/ton and sell it to B at a price of US$1,750/ton. B must accept it and A will profit from it. 50 US dollars, B loses 50 US dollars.

Selling the right - A can sell the put option at $55. A makes a profit of $50.

If the price of copper futures rises, A will give up this right and lose $5, and B will gain a net gain of $5.