NISM Certifications · NISM-Series-VIII: Equity Derivatives · Introduction to Options
In the context of exchange-traded index options in India, which statement correctly describes the position of an option writer (seller)?
The option writer receives the premium and is obliged to perform if the buyer exercises the option. Only the buyer has the right without obligation, and only the buyer pays the premium, so the writer carries the obligation and the potential risk.
- APays the premium and has the right but not the obligation to exercise
- BReceives the premium and has an obligation to perform if the buyer exercisesCorrect
- CPays the premium and has an obligation to perform if the buyer exercises
- DReceives the premium and has the right but not the obligation to exercise
Explanation
An option writer receives the premium from the buyer in exchange for taking on the obligation to deliver or settle if the buyer exercises. The buyer alone holds the right. Options that give the writer a right or have the writer paying the premium describe the buyer instead.
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