What are the obligations of buyers and sellers of options contracts?
| Action | Obligation | Description |
| Buying a Call Option | Buyer has the right, but not the obligation, to buy the underlying asset at the strike price on or before the expiration date. | The buyer pays a premium for this right. If the underlying asset price increases above the strike price by expiration, the option becomes profitable. If the price stays below or falls, the option loses value and expires worthless. |
| Selling a Call Option (Naked Call) | Seller has the obligation to sell the underlying asset at the strike price if the buyer exercises the option, even if they don’t own it. | This strategy is riskier as the seller has unlimited potential losses if the price rises sharply. Requires a margin deposit and carries high risk. |
| Buying a Put Option | Buyer has the right, but not the obligation, to sell the underlying asset at the strike price on or before the expiration date. | The buyer pays a premium for this right. If the underlying asset price falls below the strike price by expiration, the option becomes profitable. If the price stays above or rises, the option loses value and expires worthless. |
| Selling a Put Option (Naked Put) | Seller has the obligation to buy the underlying asset at the strike price if the buyer exercises the option, even if they don’t have the cash. | This strategy is riskier as the seller has unlimited potential losses if the price falls sharply. Requires a margin deposit and carries high risk. |
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