Definition
The term option buyer refers to an investor that pays a premium to the writer of an option for the right, but not an obligation, to buy or sell the underlying asset. The most common options purchased by a buyer include puts and calls.
Explanation
Also referred to as an option holder, an option buyer is a trader that pays a premium to the seller, or writer, of the option. If the writer owns the underlying security, they are selling a covered option. Conversely, if the writer does not own the underlying, the option is said to be uncovered, or naked.
An option holder cannot lose more than the premium they paid for the option. They also have the ability to sell the option contract, transferring their rights to the buyer. Investors may hold an option as a hedge against the price movement of the underlying asset as well as to speculate. Generally, a trader can buy a put or a call option:
Holding a Put Option: The holder of a put option pays a premium to the writer for a right, but not an obligation, to sell the underlying asset to the writer at the option's strike price.
Holding a Call Option: The holder of a call option pays a premium to the writer for a right, but not an obligation, to buy the underlying asset from the writer at the option's strike price.
Related Terms
option writer, approved warehouse, approved delivery facility, alternative delivery procedure
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