InvestorQ : Why would somebody give another person the right without obligation?
Bhavik Nehru made post

Why would somebody give another person the right without obligation?

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Bhavik Nehru answered.
3 years ago
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That is an interesting question. And it is also a logical question. Somebody must be really foolish to give another person a right to buy or sell at an asset without any obligation. For example, X buys a call option on Reliance at 900 and if the price goes down to Rs.880 on the expiry day then X says he does not want that option. That is obvious. Why should X buy at Rs.900 when the stock is available in the stock market at Rs.880? But that still leaves out the big question. Who is the counterparty who will give you this kind of a right without obligation? They are called option sellers. It does not come free because when you buy an option you pay a premium on the option. This premium is the price for the right without the obligation and is paid by the buyer of the option to the seller of the option. When you buy and sell options in the market, you actually pay for this right without the obligation. Option premium is the price paid by the buyer to the seller to acquire the right to buy or sell.
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