At this point, you might well ask, who sells the options that
option buyers purchase? The answer is that options are sold by
other market participants known as option writers, or grantors.
Their sole reason for writing options is to earn the premium paid
by the option buyer. If the option expires without being exercised
(which is what the option writer hopes will happen), the writer
retains the full amount of the premium. If the option buyer exercises
the option, however, the writer must pay the difference between
the market value and the exercise price. It should be emphasized
and clearly recognized that unlike an option buyer who has a limited
risk (the loss of the option premium), the writer of an option
has unlimited risk. This is because any gain realized by the option
buyer if and when he exercises the option will become a loss for
the option writer.
||Except for the premium, an option buyer has the same
profit potential as someone with an outright position in
the underlying futures contract.
||An option maximum loss: is the premium paid for the option
||An option writer's maximum profit is premium received
for writing the option
||An option writer's loss is unlimited. Except for the
premium received, risk is the same as having an outright
position in the underlying futures contract.