Option writer

Options must originate with a person who creates an option. This is the option writer. The option writer is the first seller of an option, although it may subsequently be traded further.

The option writer takes on a significant risk, due to the potential obligation to buy a security at below its market value (in the case of a put option) or sell a security at under its market value (in the case of a call option).

This risk can usually be hedged. In the case of a call option it can be hedged simply by holding the securities which would have to be delivered if the option is exercised.

Option writers are likely to use strategies that are less expensive than holding enough of a security to be able to settle. Delta hedging is a simple example of such a strategy, others can be much more complex.

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