When you buy a call or put option, is it tied to the particular person who wrote the option to you? What is to prevent the person from running away and not fulfilling the option when you try to exercise it?
2007-01-11 02:41:36 · 4 answers · asked by Anonymous in Business & Finance ➔ Investing
To answer your question, no. The option is not tied to a particular option. In fact, when someone exercises their option, it's almost random who gets to fill the order.
And as one other person mentioned, you put up the monies ahead of time if you're a seller of an option, so short of a stock dropping to zero and the person skipping town, the monies always there to cover it. In the extreme case just mentioned, I believe that the broker is liable to cover it (since they set their own margin requirements for traders).
Hope that helps!
2007-01-11 04:32:03 · answer #1 · answered by Yada Yada Yada 7 · 1⤊ 0⤋
The previous answers are incorrect.
If it is an exchange traded option -- the counterparty is always the clearing house. The exchange/clearing house will sell to you and buy from someone else -- but they take all of the counterparty risk. The only way that you would not get paid/delivery is if the entire US option market defaulted. That is not likely to happen.
If you purchase options over the counter -- then you have exposire to the counterparty. This is what happened to the Long Term Capital hedge fund. When the crisis in Asian and Russian currency occurred, their counter parties in the options and forwards markets defaulted -- cause a chain reaction that lost them $2 Billion.
For a small fee, you can have an over-the-counter option assigned to your broker -- so that it will be the counterparty & will make good on the deal if the actual seller defaults.
2007-01-11 04:31:09 · answer #2 · answered by Ranto 7 · 0⤊ 0⤋
Nobody can run away since when you write an option with a broker who executes your order he has to put up a front money with him in an account. This is the collateral sort of thing on which the options are written. The broker will execute on margin and he will liquidate the position if the market goes against the writer prematurely before the expiry to close so the undue risk is avoided.
2007-01-11 03:02:48 · answer #3 · answered by Mathew C 5 · 0⤊ 0⤋
Someone will be held accountable..the other brokerage firm, the other broker who took the other order, or the client. Also, make sure the brokerage frim you are working with is credible.
2007-01-11 02:55:57 · answer #4 · answered by Alan B 1 · 0⤊ 0⤋