BUYERS AND SELLERS.

Like in any other market, we find both buyers and sellers of option contract in the option market also. One can buy or sell two types of options namely, Calls and Puts.

As we have seen in our ‘Introduction to Derivatives – Options’, as a buyer of an option, you are called a ‘holder’ of option, and if you are a seller of an option, you’re called the ‘writer’.

If you a Holder, you have an Option …

Whether it is a Call Option or a Put Option, if you are the buyer, you are a holder. What you have bought is a right. An interesting aspect of an option is that, although you hold the right, you have the option for not exercising this right. You will exercise your right only if it is in your favour.

As seen earlier, a buyer of option can choose to BUY either a Call or a Put option.

When you buy a Call option, you get the right to buy an underlying asset (stock) within a particular period at a predetermined price known as the strike price. As it only a right, you have the option as to whether or not to exercise your right to BUY, on the expiry date of the contract.

When you buy a Put option, you get the right to SELL an underlying asset (stock) within a particular period at a predetermined price known as the strike price. As it only a right, you have the option as to whether or not to exercise your right to SELL, on the expiry date of the contract.

If the market were to move as per your expectations, you would certainly exercise your option to BUY or SELL as the case may be. But if it were contrary to your expectations, you would allow your right to lapse.

You can go to our ‘Derivatives – Options’ for the examples.

If you are a Writer, you don’t have an Option …

Whether it is a Call Option or a Put Option, if you are the seller, you are a writer. What you have sold is a right. If you have sold the right, you have an obligation. You have a commitment and obligation to honour the right of the person who bought the option. The seller or writer of the option contract doesn’t have an option but to honour the right of the buyer if he or her to exercise the right.

When an option writer sells a Call, it gives the buyer the right to purchase the underlying assets (shares) within a particular period at a predetermined price known as strike price. Although the buyer may or may not exercise his or her right, the option writer (seller) is bound by the obligation to sell.

When an option writer sells a Put, it gives the buyer the right to sell the underlying assets (shares) within a particular period at a predetermined price known as strike price. Although the buyer may or may not exercise his or her right, the option writer (seller) is bound by the obligation to buy.

Whether it is a Call or a Put option, the option writer is obliged to perform compulsory. While the gain for an option writer is limited, there is an unlimited possibility for losses. Selling options is therefore a risky business.