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Query sfm

03 April 2015

Can anyone help me to clear my doubt as to what is meant by option writer or option holder....are they both same word....further for eg.if it is given that put option can be written so whether it means we are going long or short....

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Vivek Venkataram (Just cleared CS(441/800) now C.A Final A) (772 Points)
Replied 03 April 2015

A financial derivative that represents a contract sold by one party (option writer) to another party (option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date). Call options give the option to buy at certain price, so the buyer would want the stock to go up. Put options give the option to sell at a certain price, so the buyer would want the stock to go down. This clears your first doubt.

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Vivek Venkataram (Just cleared CS(441/800) now C.A Final A) (772 Points)
Replied 03 April 2015

Essentially, when speaking of stocks, long positions are those that are owned and short positions are those that are owed. An investor who owns 100 shares of XYZ stock is said to be long 100 shares. This investor has paid in full the cost of owning the shares. An investor who has sold 100 shares of XYZ stock without currently owning those shares is said to be short 100 shares. The short investor owes 100 shares at settlement and must fulfill the obligation by purchasing the shares in the market to deliver. Oftentimes, the short investor borrows the shares from a brokerage firm in a margin account to make the delivery. Then, with hopes the stock price will fall, the investor buys the shares at a lower price to pay back the dealer who loaned them. When an investor uses option contracts in an account, long and short positions have slightly different meanings. Buying or holding a call or put option is a long position because the investor owns the right to buy or sell the security to the writing investor at a specified price. Selling or writing a call or put option is just the opposite and is a short position because the investor owes the holder the right to buy the shares from or sell the shares to him at the holder's discretion. that should clear your 2nd doubt. Cheers

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