Question

Which of the following is not true concerning call option writers?

A) The writer has the option to sell shares but not an obligation.
B) The writer's liability is zero if the option expires out-of-the-money.
C) The writer has a loss if the market price rises substantially above the exercise price.
D) The writer receives a cash payment from the buyer at the time the option is purchased.
E) Writers promise to deliver shares if exercised by the buyer.

Answer 1

The correct answer is D) The writer receives a cash payment from the buyer at the time the option is purchased.

Step-by-step explanation:

The correct answer is D) The writer receives a cash payment from the buyer at the time the option is purchased. Call option writers, also known as sellers, do not receive any cash payment from the buyer at the time the option is purchased. Instead, they collect a premium, or fee, from the buyer in exchange for granting them the right to buy shares of a stock at a specified price, known as the exercise price.

If the option expires out-of-the-money, meaning the stock price is below the exercise price, the writer's liability is indeed zero. However, if the market price rises substantially above the exercise price, the writer can incur a loss as they are obligated to sell shares to the buyer at the exercise price.

Therefore, options A, B, C, and E are all true statements concerning call option writers.