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trading:option-buyer-and-seller

Option buyer and seller

Options give the right to their holder to buy or sell the underlying asset and as a derivative have their own buyer and seller. I know that this is confusing to a lot of traders and that's why I'll try to explain it. The buyer of the option is an individual or institutional investor or speculator which, by payment of the premium, receives the right to buy (in the case of a call option) or sell (in the case of a put option ) the underlying asset. The other counterpart of the transaction the seller (writer) of the option, is an individual or institutional investor or speculator which is required, if the buyer of the option decides to exercise it, to sell (in the case of a call option) or buy (in the case of a put option) the underlying asset. This could sound a little complicated, but in fact, it is not. Many novice traders are confused by the fact that the seller has the option and the right to sell the underlying asset. It's just terminology and with a short presentation of different combinations of various terms I will try to make things clearer. We have the following four main situations:

Buyer of a call option - acquires the right, without the obligation to buy the underlying asset at the strike price, before (American option) or only at the expiry (European option). Pays the option price (premium), and the risk is limited to its value. The amount of the potential profit is theoretically unlimited. After exercising the option, acquires a long position in the underlying asset;

Buyer of a put option - acquires the right, without the obligation to sell the underlying asset at the strike price, before (American option) or only at the expiry (European option). Pays the option price (premium), and the risk is limited to its value. The amount of the potential profit is theoretically unlimited. After exercising the option, acquires a short position in the underlying asset;

Seller of a call option - has the obligation to sell the underlying asset at the strike price before (American option) or at the expiry date (European option) if the option is exercised by the buyer. Receives the option price (premium), and the profit is limited to its value. The amount of potential loss is theoretically unlimited. After the option is exercised, takes a short position in the underlying asset;

Seller of a put option - has the obligation to buy the underlying asset at the strike price before (American option) or at the expiry date (European option) if the option is exercised by the buyer. Receives the option price (premium), and the profit is limited to its value. The amount of potential loss is theoretically unlimited. After the option is exercised, takes a long position in the underlying asset.