Legal Definitions - writer

In the world of securities, a writer refers to the individual or institution that sells an options contract. When someone acts as a writer, they are creating and selling this contract to another party, and in doing so, they take on a specific financial obligation. This obligation requires them to either buy or sell an underlying asset (such as stocks, commodities, or currencies) at a predetermined price, should the buyer of the option choose to exercise their contractual right. In exchange for taking on this potential obligation, the writer receives a payment, known as a premium, from the option buyer.

• Example 1: Selling a Call Option
  Imagine an investor named Maria believes that shares of TechCorp, currently trading at $150, are unlikely to rise above $160 in the next three months. To earn some income, she decides to write (sell) a call option on TechCorp stock with a strike price of $160 and a three-month expiration. For selling this option, she receives a premium of $5 per share. As the writer, Maria is now obligated to sell 100 shares of TechCorp stock to the option buyer at $160 per share if the buyer chooses to exercise their right before the option expires.

• Example 2: Selling a Put Option
  A large hedge fund anticipates that the price of a certain agricultural commodity, like corn futures, will remain stable or even increase over the next six months. To capitalize on this outlook, the fund decides to write (sell) put options on corn futures with a strike price of $5 per bushel. By taking on the role of the writer, the hedge fund receives a premium for each contract sold. In return, they are obligated to buy corn futures at $5 per bushel from the option buyer if the buyer exercises their option, which would typically happen if the market price of corn falls below $5.

• Example 3: Generating Income with Existing Shares
  Sarah owns 300 shares of a stable utility company, PowerGrid Inc. To generate additional income from her holdings, she decides to write "covered call" options. She sells three call options (each representing 100 shares) with a strike price slightly above PowerGrid's current market value and a one-month expiration. As the writer, Sarah receives a premium for each option. If the PowerGrid stock price rises significantly and the option buyers exercise their options, Sarah is obligated to sell her existing PowerGrid shares at the agreed-upon strike price.