What this unit covers
See that every option has two sides with very different risk: a buyer with limited risk and a seller with real, sometimes large, risk.
By the end you will be able to
- Explain why an option buyer and seller hold different risk positions, not mirror images.
- Describe how the premium prices the difference between a right and an obligation.
- Recognise that selling an option is a conscious decision to accept someone else's uncertain outcome.
How it starts: Two Sides of the Same Promise
- A trader offers you the right to sell a stock at 500 rupees.
- You pay 40 rupees a share for that right, nothing more.
- The trader accepts your 40 rupees, so whose risk just grew larger?
Words you will meet
- Option buyer
- The person who pays a premium for the right to act, with loss capped at that premium.
- Option seller
- The person who receives the premium and must honour the buyer's choice if they act.
- Premium
- The price the buyer pays and the seller receives for taking on the option's obligation.
- Right
- The buyer's choice to act on the option or let it go, never a requirement.
- Obligation
- The seller's duty to honour the buyer's choice if the buyer decides to act.
In this module: Options Fundamentals
- Calls and Puts
- Strike, Expiry & Premium
- Buyer and Seller Roles (this unit)
- ITM, ATM, OTM & Intrinsic/Time Value
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