Question

Describe the various put and call strategies from the writer and buyer's perspectives. Assess the risks associated with each strategy from each perspective. In addition, put yourself in the role of the writer or the buyer and provide a scenario in which you would exercise a put or a call strategy. Include a brief synopsis of your scenario and the reasoning for your decision.

Answer 1

● Call option: A call option gives the holder the right but not the obligation to buy an asset by

a certain date for a certain price.

● Put option: A put option gives the holder the right but not the obligation to sell an asset by

a certain date for a certain price.

Call options—Give the buyer the right, but not the obligation, to buy the

underlying at the stated strike price within a specific period of time.

Conversely, the seller of a call option is obligated to deliver a long position

in the underlying futures contract from the strike price should the buyer

choose to exercise the option. Essentially, this means that the seller would

be forced to take a short position in the market upon expiration.

● Put options—Give the buyer the right, but not the obligation, to sell the

underlying at the stated strike price within a specific period of time. The

seller of a put option is obligated to deliver a short position from the strike

price (accept a long futures position) in the case that the buyer chooses to

exercise the option. Keep in mind that delivering a short futures contract

simply means being long from the strike price.

Call options—Give the buyer the right, but not the obligation, to buy the

underlying at the stated strike price within a specific period of time.

Conversely, the seller of a call option is obligated to deliver a long position

in the underlying futures contract from the strike price should the buyer

choose to exercise the option. Essentially, this means that the seller would

be forced to take a short position in the market upon expiration.

● Put options—Give the buyer the right, but not the obligation, to sell the

underlying at the stated strike price within a specific period of time. The

seller of a put option is obligated to deliver a short position from the strike

price (accept a long futures position) in the case that the buyer chooses to

exercise the option. Keep in mind that delivering a short futures contract

simply means being long from the strike price.

Writing Call and Put option

An option trade is a contract. If you buy a call option, you have

entered into a contract with some other trader who wrote that call

option. That may be a small trader just like you. So long as you

have permission from your brokerage to trade options, you can

write them (sometimes with substantial restrictions) just as easily as

buy them. When you write a call for 1 contract (representing 100

shares of stock) then you create Open Interest of 1 contract.

When you offset this by Buying to Close (if you do that) the Open

Interest falls by 1 contract.

When writing calls, if you own the stock that must be delivered if

the option is in the money at expiration, you are writing a covered

call, which is generally allowed without restriction.