Buying and Selling an Options Contract

Two additional terms important to understanding an options contract are the holder and the writer. The holder is the buyer of the options contract and the one who receives the right to buy or sell the underlying asset. The writer, on the other hand, is the seller of the options contract and will take on the obligation to either sell or buy the underlying asset from a holder. Because the writer is obligated by the options contract to buy or sell, the writer receives payment for the sale of the options contract. This payment is called the premium.

An options contract, unlike the underlying asset, is a wasting asset and only has the potential for value from the time it was created until it expires. The actual date and time of expiration depends on the expiration rule for that kind of option. Options contracts can be traded as a financial instrument until expiration; however, at expiration, depending on its value, the options contract will expire worthless, be exercised & assigned.

When a holder of an options contract implements their right to either buy (in the case of a call) or sell (in the case of a put) the underlying asset per the terms of the options contract, the option is exercised. If the option writer receives an exercise notice that obligates the sale (in the case of a call), or purchase (in the case of a put) of the fixed amount of the underlying asset at the specified strike price, the options contract is then assigned (also termed assignment).