NISM Certifications · NISM-Series-VIII: Equity Derivatives · Introduction to Options
Which of the following is true about the position of an option writer (seller) of a call option?
A call writer's profit is capped at the premium received, while the loss can be unlimited if the underlying price rises sharply. Writers must also deposit margin because of this open-ended risk, which distinguishes them from buyers who risk only the premium.
- AProfit is limited to the premium received, while potential loss is unlimitedCorrect
- BProfit is unlimited, while loss is limited to the premium received
- CBoth profit and loss are limited to the premium
- DLoss is limited to the premium and the writer pays no margin
Explanation
A call writer keeps the premium if the price stays at or below the strike, so the maximum gain is the premium. If the underlying rises sharply, losses grow without limit. Writers are also required to pay margins, so the last option is wrong.
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