Proactive hedging option holders, per their namesake, seek to proactively cover their risk of exposure; the option writers only bear a residual portion of the risk.
When the price of an underlying asset intersects the option exercising price, the option goes into effect and the option holder may trade in or sell out the underlying asset at exercising price from the option writer. However, if the price of the underlying asset does not intersect the exercising price, the option holder loses the money he or she initially paid for the option.
Under the Regulations Governing the Index Options; only the Institutions, TREC Holding Members of PSX and Non-Broker Clearing Member of the NCCPL that are meeting the conditions set in the eligibility criteria are eligible to become Option Writers for which the main idea is to ensure that the Writer of Option Contracts has sound financial and technical standing to qualify for this mode of trade.
Any Broker / entity that fulfils the eligibility criteria given below would be considered eligible as an option writer in the options market:
In sum, option writers are generally willing to accept the risks of
deductions for option writers would also have adverse collateral
, however, quote their prices based on the volatility of the log closing price change [[sigma].sub.c].
Question--How is the premium income received by option writers
On these markets the implied volatility is directly observable through the quotes of option writers
and option buyers.
In the second scenario, dynamic hedging strategies used by option writers
produce selling pressures that impair market liquidity and amplify price declines, and, in the event, render the dynamic hedges ineffective.
command more premium for taking that risk, but the proportional price increase in premium is far larger the nearer the option is to expiration.
Unlike the options traded in regulated exchanges, there is no organized exchange to ensure that option writers
will fulfill the contractual obligations in the OTC markets.