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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved