Only the buyer exercises. The buyer of a call option buys the underlying asset at the strike price, and the buyer of a put option sells it at that price1.

Consider a hypothetical example in which you buy a call with a strike price of 1,000 yen for a premium of 100 yen. If the market price of the underlying asset is 1,200 yen at expiry, you can exercise, buy at 1,000 yen and sell in the market at 1,200 yen. The 200 yen difference less the 100 yen premium leaves a profit of 100 yen. An option for which exercising produces such a gain is called in the money. If the market price is 950 yen, exercising would lose money, so the buyer lets the option be abandoned and loses the 100 yen premium2.

The days on which an option can be exercised depend on its style. A European option can be exercised only at expiry, and an American option at any time up to expiry.

Notes

  1. Japan Exchange Group, "コール・オプション（用語集）" (Call option, glossary) and "プット・オプション（用語集）" (Put option, glossary) (in Japanese), which describe the right to buy and the right to sell the underlying asset at the strike price. ↩

  2. Central Council for Financial Services Information, "3-4 オプション取引の損益" (3-4 Profit and loss of option trading) (in Japanese), the example of the call buyer (strike 1,000 yen, premium 100 yen). The figures are the same as in the source, based on its explanation of the profit and loss when the underlying asset is at 1,200 yen and 950 yen. ↩