Forum Archive Index - March 2004

[Paul & Eunice <paul.c@paradise.net.nz>]

I have been doing a bit of reading about the use of options as an alternative to buying the underlying stock. However, I can't find anywhere the answer to the following question.

If I decide to directly sell a call option (after I have initially bought the option on the market) before the expiration date (and not purchase the underlying stock), am I then required to purchase and deliver the underlying stock to the person who has bought my call option if they decide to exercise the call (before the expiration date)?

A simple question indeed but my reading provides no clear answer. Obviously, you can make a profit if you sell the option directly (rather than exercising), but there appears to be a huge risk if you have to deliver the stock at the strike price once you have sold it. Is the answer that you can simply 'close' the option (and take the money) and the call option then ceases to exist without any further obligation?

 

Paul