When can an option buyer take delivery of the stock from the writer of an option?

Question

Can this occur before the expiration date? How does the buyer make contact with the writer to get that transfer going? Can a buyer ever be forced to deliver any stock to a writer? I have been told that the writer has a bigger burden of a possible delivery of the underlying security and that the burden of the buyer is to pay the premium for that investment when that buyer buys that.

Answer 1

There are two different styles of options. "American" options are options that can be exercised at any time during the life of the option. "Europan" style options can only be exercised at maturity. In practice many index options are European style, with a cash settlement at expiry, while most stock options are American style and can be exercised during the life op the option.

Options are exercised through the clearing organisation, which is normaly the exchange where you bought the option. You give them an exercise notification and they will randomly select an option writer who will be the counterpart. For the buyer and seller of th eoption this will be completely anonimous. A buyer can not be forced to anything; he holds the rights, while the writer holds the obligations. The buyer only has to pay the exercise or strike price that was determined for the option. You will have paid an option premium to the seller (through the exchange) to reflect that right.

The burden is only bigger for the seller if you indeed exercise your right, because the market prices have gone up beyond your strike price (in the case of a call option). In this case you wil buy the stocks cheaper than would have been the case if you had to buy on the open market. But keep in mind that if the price does not move higher than the strike price, there is no point in exercising your right, since it is cheaper to buy the stocks on the market, while the seller can keep his premium as an extra return on his holdings.

Answer 2

For normal options, an option buyer can only take delivery at expiration, though this is unusual. There are some option structures out there that allow for delivery before expiration. Ordinarily, the option buyer gets the cash value for the option, which at expiration is the difference between the contract price and the market value of the stock. Then if you use those proceeds to purchase the stock in the open market, it's the same effect as calling away the stock.

Answer 3

that depends on what kind of underlying asset your option on, Stock - yes the delivery can be done before expiration but some index-only upon expiration,

No The buyer cannot be forced to take delivery from the writer, however if you do not exercise your option and it is in the money on expiration, the exchange will automatically exercise the option for you.

So if you do not want to take delivery, then if the option is in the money, you need to close the position.

But if it is not in the money than the option will just expired worthless, writer do not have the right to force you, you have the right as buyer, writer has obligation to fulfill

Hope this help

Cheers