We know that for each business contract, we have two sides, a buyer and a seller. This is true for an option contract as well. A call buyer will pay upfront (cash output) to acquire a right. Since this is a zero-sum game, a call option seller would enjoy an upfront cash inflow and assumes an obligation. The following table presents those positions (buyer or seller), directions of the initial cash flows (inflow or outflow), the option buyer's rights (buy or sell), and the option seller's obligations (that is, to satisfy the option seller's demand):
|
Buyer (long position) |
Seller (short position) |
European options |
American options | |
|---|---|---|---|---|
|
Call |
An obligation to sell a security (commodity) at a prefixed price |
Are exercised on the maturity date only |
Could be exercised any time before or on the maturity date | |
|
Put |
An obligation to buy... |