The 'optionality' characteristic of Options results in a non-linear payoff for them.

In simple words, it means that the losses for the buyer of an Option are limited, however, the profits are potentially unlimited.

For a writer (seller), the payoff is exactly the opposite. His profits are limited to the Option premium, however, his losses are potentially unlimited.

By using combinations of Options and the underlying these non-linear payoffs are used to generate various other payoffs. Here are six basic payoffs from which various trading and investing strategies are derived:

**Payoff profile of the buyer of an asset: Long asset**

In this basic position, an investor buys the underlying asset, ABC Ltd. shares for instance, for Rs. 2220, and sells it at a future date at an unknown price. Once it is purchased, the investor is said to "long" the asset.

**Payoff profile for the seller of an asset: Short asset**

In this basic position, an investor shorts the underlying asset, ABC Ltd. shares for instance, for Rs. 2220, and buys it back at a future date at an unknown price. Once it is sold, the investor is said to "short" the asset.

**Payoff profile for the buyer of Call Options: Long Call**

A Call Option gives the buyer the right to buy the underlying asset at the strike price specified in the Option. The profit/loss that the buyer makes on the Option depends on the spot price of the underlying. If upon expiration, the spot price exceeds the strike price, he makes a profit. The higher the spot price, the higher the profits he makes. If the spot price of the underlying is less than the strike price, he lets his Option expire unexercised. His loss in this case is the premium he paid for buying the Option.

**Payoff profile for writer (seller) of Call Options: Short Call**

A Call Option gives the buyer the right to buy the underlying asset at the strike price specified in the Option. For selling the Option, the writer of the option charges a premium. The profit/loss that the buyer makes on the Option depends on the spot price of the underlying. Whatever is the buyer's profit is the seller's loss. If upon expiration, the spot price exceeds the strike price, the buyer will exercise the Option on the writer. Hence as the spot price increases, the writer of the Option starts making losses. The higher the spot price, the higher the loss he makes. If upon expiration the spot price of the underlying is less than the strike price, the buyer lets his Option expire unexercised and the writer gets to keep the premium.

**Payoff profile for the buyer of Put Options: Long Put**

A Put Option gives the buyer the right to sell the underlying asset at the strike price specified in the Option. The profit/loss that the buyer makes on the Option depends on the spot price of the underlying. If upon expiration, the spot price is below the strike price, he makes a profit. Lower the spot price, the higher the profit he makes. If the spot price of the underlying is higher than the strike price, he lets his Option expire unexercised. His loss in this case is the premium he paid for buying the option.

Payoff profile for writer (seller) of Put Options: Short Put

A Put Option gives the buyer the right to sell the underlying asset at the strike price specified in the Option. For selling the Option, the writer of the Option charges a premium. The profit/loss that the buyer makes on the option depends on the spot price of the underlying. Whatever is the buyer's profit is the seller's loss. If upon expiration, the spot price happens to be below the strike price, the buyer will exercise the option on the writer. If upon expiration the spot price of the underlying is more than the strike price, the buyer lets his option unexercised and the writer gets to keep the premium.