InvestorQ : Does the option writer run a much higher risk than the buyer?
Anamika Sodhani made post

Does the option writer run a much higher risk than the buyer?

Anamika Sodhani answered.
3 years ago

The risk of an Options Writer is unlimited whereas his gains are limited to the Premiums earned. When an uncovered call is exercised for physical delivery, the call writer will have to purchase the underlying asset and his loss will be the excess of the purchase price over the exercise price of the call reduced by the premium received for writing the call. When the price movement is against you then the option writer can literally get destroyed. The writer of a put option bears a risk of loss if the value of the underlying asset declines below the exercise price. The writer of a put bears the risk of a decline in the price of the underlying asset potentially to zero. When put option holder exercises his option in the falling market, the put writer is bound to purchase the underlying at strike price, even if the underlying is otherwise available in the spot at lower price.

Another big risk for the option write is the margin risk. The option buyer has only to pay the premium but the option seller has to put SPAN margins like in case of futures and also the MTM margins if the price goes against him. At times, a sharp rise in volatility may take the option premiums sharply higher leading to a sharp spike in the MTM losses that the option seller is required to take in his books.