6 Part I: Basic Properties of Stock Options 
consists of all contracts of the same class (IBM, for example) having the same expi­
ration date and striking price. 
Opening and Closing Transactions. An opening transaction is the ini­
tial transaction, either a buy or a sell. For example, an opening buy transaction 
creates or increases a long position in the customer's account. A closing trans­
action reduces the customer's position. Opening buys are often followed by clos­
ing sales; correspondingly, opening sells often precede closing buy trades. 
Open Interest. The option exchanges keep track of the number of opening 
and closing transactions in each option series. This is called the open interest. 
Each opening transaction adds to the open interest and each closing transaction 
decreases the open interest. The open interest is expressed in number of option 
contracts, so that one order to buy 5 calls opening would increase the open 
interest by 5. Note that the open interest does not differentiate between buyers 
and sellers - there is no way to tell if there is a preponderance of either one. 
While the magnitude of the open interest is not an extremely important piece of 
data for the investor, it is useful in determining the liquidity of the option in 
question. If there is a large open interest, then there should be little problem in 
making fairly large trades. However, if the open interest is small - only a few 
hundred contracts outstanding - then there might not be a reasonable second­
ary market in that option series. 
The Holder and Writer. Anyone who buys an option as the initial transac­
tion - that is, buys opening - is called the holder. On the other hand, the 
investor who sells an option as the initial transaction - an opening sale - is called 
the writer of the option. Commonly, the writer ( or seller) of an option is referred 
to as being short the option contract. The term "writer" dates back to the over­
the-counter days, when a direct link existed between buyers and sellers of 
options; at that time, the seller was the writer of a new contract to buy stock. In 
the listed option market, however, the issuer of all options is the Options 
Clearing Corporation, and contracts are standardized. This important difference 
makes it possible to break the direct link between the buyer and seller, paving 
the way for the formation of the secondary markets that now exist. 
Exercise and Assignment. An option owner ( or holder) who invokes the 
right to buy or sell is said to exercise the option. Call option holders exercise to 
buy stock; put holders exercise to sell. The holder of most stock options may 
exercise the option at any time after taking possession of it, up until 8:00 P.M. on