Write an Option

To write an option is the same as to sell it. The seller of an option is granting the rights of the option to the buyer. The seller receives a premium or the price of the option for these rights.

An American option allows the buyer to exercise it any time during the life of the option. If the future is trading at 105 and the 100 call '" trading at 5 with a few days to expiration, Robert may choose to exercise the option. A person might want to exercise an option before the expiration date for various reasons, such as owning a stock which is about to pay a dividend. The owner of the option does not receive a dividend, so exercising the option will allow ownership of the stock which will allow the dividends to be received.

A European option can only be exercised at the expiration of the option. An American option may be valued somewhat differently than a European option because there is a slight benefit in being able to exercise an option at any time before expiration. Looking at the prior examples wi1l help us to understand the option terms:

• Call Example. Before Robert purchased the 100 call, he looked at the 95 call which was in the money, the 100 ca1l which was at the money, and the 105 call which was out of the money. After buying the 100 call the market went up to 110 and Robert decided to exercise the call, which meant he was long the future at 100.

• Put example. Before Susan purchased the 100 put, she looked at the 105 put which was in the money, the 100 put which was at the money, and the 95 put which was out of the money. After buying the 100 put the market rallied and dosed at 105 on December 29. Susan had the right to exercise the put which would give her the ability to sell the future at 100, but there would be no reason to do this. Since she can sell the future at the market at 105, she would not choose to exercise the put and sell the market at the lower price of 100.