The risk for option writers is almost unlimited. More on this later on.
The premium prices
The price of premiums varies in accordance with the rules of supply and demand, in the same way that prices change for any product.
We will speak more later about the principles of premium pricing.
Exercising options –alternate methods of execution in practice
On date B (redemption date), if it is worth exercising the option, you have three alternatives for each type of option.
Call options – execution alternatives in practice
- Purchase and hold on to the underlying asset.
- Receive the difference between the market price and the exercise price (the option profit amount).
- Sell the option to another person. The asking price would reflect the profit you would expect to receive from alternative 2.
Put options – execution alternatives in practice
- Sell the underlying asset (if you are actually holding it).
- Receive the transaction profit amount.
- Sell the option to another person.