In
options, the
risk that the
underlying asset of an option will
close near the
exercise price close to the
expiration date. In this situation, the
writer of the option does not know and cannot predict whether or not the option
holder will
exercise the option. The writer must then decide whether or not to
cover the position by taking an equal but opposite position in the underlying asset. If the writer covers the position and the option is not exercised, he/she may be forced to hold
securities that will result in a
loss. Likewise, if the writer does not cover the position and the option is exercised, he/she must rush to fulfill the contract, which may also result in a loss.