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There are two types of option contracts: Call Options and Put Options.
Call Options give the option buyer the right to buy the underlying asset.
Put Options give the option buyer the right the sell the underlying asset.
The simple examples so far have only been call options i.e. giving you the right to buy the underlying asset. You're probably already thinking "what about if I want to sell the shares instead of buy them at $25?". That is why these two types of option contracts (Calls and Puts) exist.
In our previous example, Peter bought a call option from Sarah. Peter also could have bought a put option from Sarah. Buying a put option means that Peter buys the right to sell Microsoft shares at $25 on the 5th of May. Therefore Peter will make a profit if the market is below $25 on the day of expiration.
Buying put options enables investors to profit when the markets fall without having to sell short stock.
Buyers of put options have unlimited profit potential if markets begin to sell off. Put option holders also have limited risk if the market goes against them i.e. up.
To get a better understanding of the payoff of a put option, take a look at the following option strategy graphs:
Long Put Option (Buying a Put Option)
Short Put Option (Sell a Put Option)
And then compare put option graphs to the following call option graphs:
Long Call Option (Buying a Call Option)
Short Call Option (Selling a Call Option)
Absolutely! This is how most people would trade options...for the short term gain in the value of the option contract itself based on the movements in the underlying asset.
I'm not sure about your second question though. Can you elaborate?