Option buyers and sellers: rights and obligations
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The buyer of an option is the holder of a right and has no obligation. The seller, called the writer, is obliged to fulfil the contract when the holder exercises, and receives the premium for taking that on.
Key points
- The holder of an option can sell it, exercise it or let it expire, and the choice is the holder's alone.
- The writer of an option keeps the premium and must deliver or buy the shares when the option is assigned.
- A position is opened by one order and closed by the opposite one. A writer ends the obligation by buying the same option back.
- The holder's loss stops at the premium paid. The writer's loss can be many times the premium received.
On this page
An option contract has two sides, and they are not mirror images of the same risk. One side paid for a choice. The other side was paid to accept whatever that choice turns out to be.
What the buyer of an option has
The buyer of an option is its holder. The holder paid the premium and owns the right in the contract. Until the option expires the holder has three choices:
- sell the option in the market, at the price it trades at then;
- exercise it, which means buying the shares at the strike price with a call or selling them at the strike price with a put;
- let it expire.
Nobody can oblige the holder to do any of the three. The most the holder can lose is the premium paid, and that loss is complete when the option expires out of the money.
What the seller of an option takes on
The seller who opens a position by selling an option is its writer. The writer receives the premium when the option is sold and keeps it in every case.
In exchange the writer carries an obligation for as long as the position is open. When a holder exercises, a writer of that option is assigned. The writer of a call must then deliver 100 shares per contract at the strike price. The writer of a put must buy 100 shares per contract at the strike price. Options on stocks can be exercised on any business day, so an assignment can arrive before the expiration date.
The writer cannot refuse an assignment. What the writer can do, before being assigned, is end the position by buying the same option back in the market. Once an assignment has been made, that way is closed. Exercise, assignment and expiration day describes the procedure.
How an option position is opened and closed
Every option order says whether it opens a position or closes one.
| Order | What it does | Who gives it |
|---|---|---|
| Buy to open | Buys an option and creates a long position | A buyer who becomes a holder |
| Sell to close | Sells an option that is held and ends the long position | A holder |
| Sell to open | Sells an option and creates a short position | A seller who becomes a writer |
| Buy to close | Buys back an option that was written and ends the short position | A writer |
An opening transaction creates the right or the obligation, and a closing transaction ends it. The result of a closed position is the difference between the two premiums. Holders exercise only about 7% of options, according to the Options Industry Council. The others are closed in the market or expire.
Covered and uncovered writing
What a writer risks depends on what the writer holds besides the option.
A written call is covered when the writer owns the 100 shares that the call would take. If the call is assigned, the shares are delivered, and the writer's loss is the gain given up above the strike price. A written call with no shares behind it is an uncovered option: the writer would have to buy the shares at the market price, however high, to deliver them at the strike price.
A written put is cash-secured when the writer keeps the cash to pay for the shares at the strike price. Brokers require collateral, called margin, for written options that are not covered. A broker has to approve an account for options trading, and decides which kinds of positions the account may open.
What each side of an option can make and lose
| Position | The most it can make | The most it can lose |
|---|---|---|
| Holder of a call | No upper limit | The premium paid |
| Holder of a put | The strike price less the premium, per share | The premium paid |
| Writer of a covered call | The premium, plus the rise of the shares up to the strike price | The cost of the shares less the premium |
| Writer of an uncovered call | The premium received | No upper limit |
| Writer of a cash-secured put | The premium received | The strike price less the premium, per share |
What can go wrong for the writer of an option
The premium is small next to the obligation. A writer who receives $150 for a 50 put takes on the obligation to pay $5,000 for 100 shares. If the stock falls from $52 to $26, that writer buys at $50 shares that are worth $26, and the result is ($1.50 - $24.00) × 100 = -$2,250 per contract.
An assignment can come early and at an inconvenient moment, for example on the day before the stock goes ex-dividend. The collateral a broker requires also rises when the stock moves against a written option, and the broker can close the position if the account cannot provide it.
Questions and answers
Does the writer of an option know who holds it?
No. The Options Clearing Corporation stands between the two sides. When a holder exercises, the clearing corporation assigns the exercise at random to a brokerage firm whose customers have written that option, and the firm passes it to one of those customers, usually at random or first in, first out.
Terms used on this page
- Holder
- The person who bought an option and owns its right. A holder can exercise the option, sell it or let it expire, and can lose no more than the premium paid.
- Writer
- The person who sold an option to open a position. A writer received the premium and carries the obligation to deliver or to buy the shares if the option is assigned.
- Opening transaction
- An order that creates an option position or adds to one. Buy to open makes the buyer a holder; sell to open makes the seller a writer.
- Closing transaction
- An order that reduces or ends an option position. A holder sells to close and a writer buys to close; afterwards the right or the obligation is gone.
- Exercise
- The holder's use of the right in an option, which is buying the shares at the strike price with a call or selling them at the strike price with a put.
- Assignment
- The notice to the writer of an option that a holder has exercised it, which obliges the writer to deliver (a call) or to buy (a put) the shares at the strike price.
- Margin
- The cash or securities that a broker requires from the writer of an option as collateral for the obligation. The amount required changes with the price of the underlying.
- Uncovered option
- A written option with no offsetting position, such as a call written without owning the shares. The loss of an uncovered call has no upper limit, because the price of a stock has none.
Sources
- Characteristics and Risks of Standardized Options, The Options Clearing Corporation (read 29 September 2026). The options disclosure document, edition of June 2024.
- Leverage & Risk, The Options Industry Council (read 29 September 2026).
- Options Assignment, The Options Industry Council (read 29 September 2026). Frequently asked questions.
- Options Exercise, The Options Industry Council (read 29 September 2026). Frequently asked questions.
- Opening an Options Account – Investor Bulletin, U.S. Securities and Exchange Commission (read 29 September 2026).
- Equity Options Product Specifications, Cboe Global Markets (read 29 September 2026).
- Trading Options: Understanding Assignment, Financial Industry Regulatory Authority (read 29 September 2026). Article of December 2020.