An option writer is an individual or entity that has sold an option contract on an exchange to an option holder. Thus the option writer immediately receives the proceeds of the option sale. Depending upon the option type, the option writer could be called upon to deliver the underlying asset at any time prior to expiration, if it is an American option, or on the expiration date, if a European option. An option writer can also close out the position by buying an identical contract. If the option writer does not have a position in the underlying asset, the option writer has what is called a naked option. A naked option creates considerable loss exposure for the option writer. For instance, if an option writer sells a call option to deliver IBM common stock for $80 and does not own IBM shares, and if the option holder exercises when the market price of IBM is at $92, the option writer will lose $12 per share. |
