Question about Call options
1.) When you buy a call/put option then sell it for a premium what happens to the writer of the call? Are you considered the new writer?
2.) When one writes a call/put option how do they chose the date of expiration? Are there some dates that are allowed some that are not?
3.) Who writes the options? I know some brokers do let one write an option.(that is why i'm wondering what parameters can they set such as strike and date of expiration). Are option writers mostly hedge funds/banks?
4.) Do large institutions write options as a legal black market to clear books? For example, suppose the US government wanted to get C off its books, could it just write some call options deep in the money and hope the holder executes? That way instead of having the shares being sold to the market crushing the price it would just be transfered into the account of the call holder? Or would the market seeing so many call options some on wrote make the stock tank even faster?
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2) Depends. If the options are exchange traded, there are generally set schedule when options expire (check CBOE for example). If its OTC, any date is possible really.
You am pretty sure that you would be the new writer. The question is whether or not your broker just lets you cancel out the position by selling a call (when you are already long) like futures or whether you just keep both options on your book until expiration.
OTC options like FX (which is primarily over the counter) can have any tenor that the person wants. An exchange traded option expires the third Friday of the month.
The market would see the calls being sold, also I am pretty sure that most people would not want to buy deep in the money calls because the premiums would be too high. People buy options because they have a limited downside or because they want to hedge the risk. If they really liked a stock enough, they would buy the stock where they get ownership rights, dividends, don't have to worry about the option expiring or theta, and don't have to pay the extremely high premiums.
1) If you are long an option and then sell it you are flat. The term "writer" is beside the point...you bought the option and then you sold it. 2) Some options are traded on exchanges and those have standard expiration dates and others are traded OTC and any date can be used for expiration. 3) Writing or selling options can be done by just about anybody who wants to be short volatility. everyone from big hedge funds to individual investors sells options from time to time. 4) If somebody sold a tremendous amount of in-the-money calls on a stock the price would go down just like if they sold the stock outright. I dont really understand why the government would sell call as opposed to just selling their shares if they wanted to divest themselves of their position.
thx bon
Writing deep ITM call options doesn't solve the problem as deltas for these options are very close to 1 (for convenience,let's just assume it's 1). In that regard, these options pretty much trade like stocks anyway.
Hence, why would you want to write options to get the stock off your book when selling the actual stock is the sole viable way of discarding the stocks on hand?
As these calls are deep ITM, writing many such calls is akin to selling many such stocks - the markets will naturally tank if there was a huge sell order in the market, which explains why the Fed/Treasury has been trying to offload the stocks over a reasonably prolonged period of time.
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