33 lines
2.4 KiB
Plaintext
33 lines
2.4 KiB
Plaintext
Contractual Rights and Obligations
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The option buyer is the party who owns the right inherent in the contract.
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The buyer is referred to as having a long position and may also be called the
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holder, or owner, of the option. The right doesn’t last forever. At some point
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the option will expire. At expiration, the owner may exercise the right or, if
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the option has no value to the holder, let it expire without exercising it. But
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he need not hold the option until expiration. Options are transferable—they
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can be traded intraday in much the same way as stock is traded. Because it’s
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uncertain what the underlying stock price of the option will be at expiration,
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much of the time this right has value before it expires. The uncertainty of
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stock prices, after all, is the raison d’être of the option market.
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A long position in an option contract, however, is fundamentally different
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from a long position in a stock. Owning corporate stock affords the
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shareholder ownership rights, which may include the right to vote in
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corporate affairs and the right to receive dividends. Owning an option
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represents strictly the right either to buy the stock or to sell it, depending on
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whether it’s a call or a put. Option holders do not receive dividends that
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would be paid to the shareholders of the underlying stock, nor do they have
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voting rights. The corporation has no knowledge of the parties to the option
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contract. The contract is created by the buyer and seller of the option and
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made available by being listed on an exchange.
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The party to the contract who is referred to as the option seller, also called
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the option writer, has a short position in the option. Instead of having a right
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to take a position in the underlying stock, as the buyer does, the seller
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incurs an obligation to potentially either buy or sell the stock. When a trader
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who is long an option exercises, a trader with a short position gets assigned
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. Assignment means the trader with the short option position is called on to
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fulfill the obligation that was established when the contract was sold.
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Shorting an option is fundamentally different from shorting a stock.
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Corporations have a quantifiable number of outstanding shares available for
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trading, which must be borrowed to create a short position, but establishing
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a short position in an option does not require borrowing; the contract is
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simply created. The strategy of shorting stock is implemented statistically |