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premium is the option holder, not the option writer.
14) An option writer would have to take a position both in the underlying asset (delta hedging) and in another option (vega hedging) to hedge both sources of risk.
Most options on futures are cash settled, meaning that the option writer must provide the cash equivalent of the difference between the futures price and the strike price to the option buyer.
Using our hypothetical example as a basis, an option writer can earn 10.
Referring to the final case of selling or writing a put option, the option writer earns the premium, but accepts substantial risk should the pound sterling depreciate.
Once an option writer has received an exercise notice, it cannot effect a closing purchase transaction in order to terminate its obligation under the option and must deliver the underlying security at the exercise price.
Purchasers of options pay an amount, known as a premium, to the option writer in exchange for the right under the option contract.
This tutorial presents the market conditions under which it is profitable to exercise an option and the payoffs to both the option buyer and option writer at the time of the option being exercised.