Which of the following statements is true of the writer of a listed equity call option?
They have the obligation to sell stock at a fixed strike price.
When a writer sells a listed equity call option, they are obligated to sell the underlying stock at the predetermined strike price if the option is exercised by the buyer. This means the writer takes on the risk of having to sell their shares at a lower price than the market value if the option is exercised.
This statement incorrectly describes the position of the option writer. The right to sell stock at a fixed strike price belongs to the buyer of the put option, not the writer of a call option. The writer does not have rights; instead, they assume obligations.
This statement pertains to the buyer of a call option, who has the right to purchase stock at the strike price. The writer of the call option does not possess this right; rather, they are obligated to fulfill the contract if exercised.
This is the correct statement, as the writer of a call option commits to selling the underlying stock at the strike price if the option is exercised. This obligation can result in a loss if the market price is higher than the strike price at the time of exercise.
This statement describes the obligation of the writer of a put option, not a call option. The writer of a call option does not have an obligation to buy stock; their role is to potentially sell stock at the strike price.
The writer of a listed equity call option is characterized by their obligation to sell the underlying stock at a fixed strike price if the buyer exercises the option. This unique position contrasts sharply with the rights of option buyers, who can choose to execute their options. Understanding these roles is essential for participants in the options market, ensuring clarity in trading strategies and potential risks.
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