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FRM Part I · FRM Exam Part I · Introduction to Derivatives

Which statement about the position of an option writer versus the holder is correct for a European call option?

A call writer's maximum gain is the premium received, while potential loss is unlimited. The writer keeps the premium if the option expires worthless, but must sell at the strike if exercised, so losses rise without bound as the stock price increases.

  1. AThe writer's maximum gain is the premium received and the loss potential is unlimitedCorrect
  2. BThe writer's maximum loss is the premium received and the gain is unlimited
  3. CThe writer's maximum gain is the strike price and the loss is limited to the premium
  4. DThe writer has the right to exercise if the stock rises above the strike

Explanation

A call writer keeps the premium if the option expires worthless, which is the maximum gain. If the stock rises, the writer must deliver at the strike, so losses grow without limit as the price rises. The holder, not the writer, has the exercise right.

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