Definitions Warmup

Question 1

Does a call option give the owner the right to buy or sell the underlying stock?

Answer 1

Buy

A call option is the right, but not the obligation, to buy some asset in the future, at a price that is agreed upon today, called the strike price.

Question 2

Does a put option give the owner the right to buy or sell the underlying stock?

Answer 2

Sell

A put option is the right, but not the obligation, to sell some asset in the future, at a price that is agreed upon today, called the strike price.

Question 3

If you have sold/written a call option, and the option is exercised, will you have to buy or sell the underlying stock?

What do you get in return for this obligation?

Answer 3

Sell.

With a call option, the option buyer has the right to buy the stock. There must be someone to sell the stock. This is the call option writer. Therefore, if the option is exercised, the option writer must sell the stock for the strike price.

In return for being obligated to sell the stock for the strike price if the option is exercised, the option writer receives the premium paid by the option buyer.

Question 4

If you have sold/written a put option, and the option is exercised, will you have to buy or sell the underlying stock?

What do you get in return for this obligation?

Answer 4

Buy.

With a put option, the option buyer can sell the stock to the option writer. Therefore, if the option is exercised, the option writer must buy the stock for the strike price.

In return for being obligated to buy the stock for the strike price if the option is exercised, the option writer receives the premium paid by the option buyer.