Participants in the Options Market

There are four types of participants in options markets depending on the Potion they take.

People who buy options are called holders, and those who sell options are called writers; furthermore, buyers are said to have long positions, and sellers are said to have short positions.

Call holders and put holders (buyers) are not obligated to buy or sell. They have the choice to exercise their rights if they choose.

Call writers and put writers (sellers), however, are obligated to buy or sell.

This means that a seller may be required to make good on a promise to buy or sell whenever the option buyer exercises his option.

1. Buyer of Call Option: The buyer of an equity call option has purchased the right, but not the obligation, to buy 100 shares of the Underlying stock at the stated exercise price at any time before the option expires.

Once the option is purchased, the buyer is then “long” the call contract, and to purchase 100 underlying shares, he notifies his brokerage firm of his intent to exercise the call contract.

For example, the buyer of one XYZ June 60 call option has the right to purchase 100 shares of XYZ stock at Rs. 60 per share up until the June expiration.

Potential Profit: Unlimited as the underlying stock price increases.

Potential Loss: Limited to premium paid-for call option.

2. Writer (Seller) of Call Option: An investor who sells an option contract that he does not already own is known as the option “writer” and is then “short” the contract.

The writer of an equity call option commonly referred to as the “seller,” has the obligation to sell 100 shares of the underlying stock at the stated exercise price if assigned an exercise notice at any time before the option expires.

For example, the writer of an XYZ June 75 call option has an obligation to sell 100 shares of XYZ stock at Rs. 75 per share if assigned at any time until June expiration.

Potential Profit: Limited to the premium received from the call’s initial sale.

Potential Loss: Unlimited as the underlying stock price increases.

3. Buyer of Put Option: A put option gives the holder the right to sell an asset at a certain price within a specific period of time.

Puts are very similar to having a short position on a stock. Buyers of puts hope that the price of the stock will fall before the option expires.

The buyer of an equity put option has purchased the right, but not the obligation, to sell 100 shares of the underlying stock at the stated exercise price at any time before the option expires.

Once the option is purchased, the buyer is then “long” the put contract, and to sell 100 underlying shares, he notifies his brokerage firm of his intent exercise the put contract.

For example, the buyer of one XYZ June 70 put option has the right to sell 100 shares of XYZ stock at Rs. 70 per share up until the June expiration.

Potential Profit: Substantial and increases as the underlying stock price decreases to zero.

Potential Loss: Limited to premium paid for the put.

4. Writer (Seller) of Put Option: An investor who sells an option contract that he does not already own is known as the option “writer” and is then “short” the contract.

The writer of an equity put option, commonly referred to as the “seller,” has an obligation to purchase 100 shares of the underlying stock at the stated exercise price if assigned an exercise notice at any time before the option expires.

For example, the writer of an XYZ June 80 put option has an obligation to purchase 100 shares of XYZ stock at Rs. 80 per share if assigned at any time until June expiration.

Potential Profit: Limited to the premium received from put’s initial sale.

Potential Loss: Substantial and increases as the underlying stock price decreases to zero.

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