Question

What does it mean to say that a buyer has a right, not an obligation?

Answer 1

I am assuming this question is in the context of options.

A buyer of an option, whether it is a call option or put option, has right but not obligation to exercise their option.

Call option:

If the strike price is $50 and stock price is $55, a buyer of a call option has the right to exercise his option which gives him a right to buy the stock at $50 and make a profit of $5. If the stock price ends at $45, the option buyer will not exercise his option and let the option expire. Therefore, the buyer has no obligation to exercise his option if the stock price ends below the strike price. he can let the option expire to avoid loss.

Put option:

If the strike price is $50 and stock price is $45, a buyer of a put option has the right to exercise his option which gives him a right to sell the stock at $50 and make a profit of $5. If the stock price ends at $55, the option buyer will not exercise his option and let the option expire. Therefore, the buyer has no obligation to exercise his option if the stock price ends above the strike price. He can let the option expire to avoid loss.