The option writer determines when/if an option is exercised. True or False?

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Expert Solution

Call Option:

Holder of call option will have right to buy underlying asset at the agreed price ( Strike Price). As he is receiving right, he needs to pay premium to writer of call option. Holder of calloption will exercise the right, when expected future spot price > Strike Price. Then writer of option has obligation to sell at the strike Price. Holder will go for call option if he is bullish.

If the Future SPot Price > Strike Price - In the Money
If the Future SPot Price = Strike Price - At the Money
If the Future SPot Price < Strike Price - Out of the Money

Put Option:

Holder of Put option will have right to sell underlying asset at the agreed price ( Strike Price). As he is receiving right, he needs to pay premium to writer of Put option. Holder of put option will exercise the right, when expected future spot price < Strike Price. Then writer of option has obligation to buy at the strike Price. Holder will go for put option, if he is bearish.

If the Future SPot Price < Strike Price - In the Money
If the Future SPot Price = Strike Price - At the Money
If the Future SPot Price > Strike Price - Out of the Money

In both cases, Holder of option will decide, whether exercise/ lapse the option, Writer has obligation when the holder exercises his right.

Hence statement is False.

jeff jeffy answered 1 year ago

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