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NISM Certifications · NISM-Series-VIII: Equity Derivatives · Introduction to Options

In the options market, which of the following best describes the position of an option writer (seller) of a call option?

A call option writer receives the premium from the buyer and takes on the obligation to sell the underlying at the strike price if the buyer exercises. The buyer holds the right, while the writer holds only the obligation and faces potentially unlimited loss.

  1. AHas the right to buy the underlying at the strike price and pays a premium
  2. BHas an obligation to sell the underlying at the strike price if exercised, and receives a premiumCorrect
  3. CHas the right to sell the underlying at the strike price and receives a premium
  4. DHas an obligation to buy the underlying at the strike price if exercised, and pays a premium

Explanation

A call writer receives the premium and must deliver the underlying at the strike price if the buyer exercises. Only the buyer holds the right; the seller holds the obligation. The option that gives a right to buy describes the call buyer, not the writer.

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