His loss in this case is the premium he paid for buying the option. If the spot price of the underlying is higher than the strike price, he lets his option expire un-exercised. Lower the spot price, more is the profit he makes. If upon expiration, the spot price is below the strike price, he makes a profit. The profit/loss that the buyer makes on the option depends on the spot price of the underlying.
Payoff profile for buyer of put options: Long putĪ put option gives the buyer the right to sell the underlying asset at the strike price specified in the option. If upon expiration the spot price of the underlying is less than the strike price, the buyer lets his option expire un-exercised and the writer gets to keep the premium. Higher the spot price, more is the loss he makes. Hence as the spot price increases the writer of the option starts making losses. If upon expiration, the spot price exceeds the strike price, the buyer will exercise the option on the writer. Whatever is the buyer's profit is the seller's loss. 
For selling the option, the writer of the option charges a premium. Payoff profile for writer (seller) of call options: Short callĪ call option gives the buyer the right to buy the underlying asset at the strike price specified in the option.If the spot price of the underlying is less than the strike price, he lets his option expire un-exercised. Higher the spot price, more is the profit he makes. If upon expiration, the spot price exceeds the strike price, he makes a profit. Payoff profile for buyer of call options: Long callĪ call option gives the buyer the right to buy the underlying asset at the strike price specified in the option.Once it is sold, the investor is said to be "short" the asset. 2220, and buys it back at a future date at an unknown price, St.
In this basic position, an investor shorts the underlying asset, ABC Ltd.
Payoff profile of seller of asset: Short asset. Once it is purchased, the investor is said to be "long" the asset. 2220, and sells it at a future date at an unknown price, St. In this basic position, an investor buys the underlying asset, ABC Ltd. Payoff profile of buyer of asset: Long asset. We look here at the six basic options payoffs (pay close attention to these pay-offs, since all the strategies in the book are derived out of these basic payoffs). His profits are limited to the option premium, however his losses are potentially unlimited. These nonlinear payoffs are fascinating as they lend themselves to be used to generate various payoffs by using combinations of options and the underlying. For a writer (seller), the payoff is exactly the opposite. In simple words, it means that the losses for the buyer of an option are limited, however the profits are potentially unlimited. The optionality characteristic of options results in a non-linear payoff for options.
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