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Players Involved In Options Trading.

Similar to any trade options trading also involves two parties. They are:

1.Option Buyer:The buyer side of the option contract. The buyer of the option has right to exercise the option on or before the expiry date but is not obliged to buy.

Buyer of option makes profit only when the market moves in intended direction. If market does not move at all then buyer looses the premium. Refer to scenario 1 of the example.
Buyer can trade in options of a security with minimal investment.

As we have seen in the above example that the buyer of the option capital investment (Premium) is fraction of the instrument value but can potentially gain unlimited profits. Refer to scenario 4.
Total capital at risk is known to the buyer. They are not up to any major surprise.

Option buyer is also called as holder of the option.

2.Option seller: They are on seller side of the option. Once they enter into contract, they are obliged to sell the security if buyer wants to buy.

Option seller gets guarantees premium value irrespective market movement. Refer to scenario 1 of the example.

Maximum profit potential of seller is limited but are exposed to unlimited loss.

Seller of option are also called option writer.

For example:

examples of option trading with various scenario

Various scenarios after one month

examples of option trading with various scenario

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