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In: Finance

financial derivatives "owners of options have rights and sellers of options have obligation" what does this...

financial derivatives

"owners of options have rights and sellers of options have obligation"

what does this sentence mean?

Solutions

Expert Solution

Options are of 2 types:

Call option &

Put option

Owner of a call option have at right to buy at pre-decided price (strike price) at the predetermined date (expiry date).

Owner of call option won't execute his right to buy stock if strike price on expiry is more than market price.

He would rather buy from market and not excercise his right to buy the stock at strike price.

However, if strike price is lower than the market price, owner of option will excercise his right to buy at strike price.

And when owner of option excercise his right, seller of optiion is under obligation to sell the stock at strike price which is lower than market price. Thus seller of option does not have any right but is under obligation

Similarly, Owner of a put option have at right to sell at pre-deceided price at the predetermined date (expiry date). While buyer of put option is under obligation to buy the stock at strike price if option buyer excercise his right to buy.

jeff jeffy answered 1 year ago
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