MOTIVATION BEHIND OPTION TRADING
An option gives the buyer the right but not the obligation to enter at a future date into a transaction specified today. The buyer will obviously use it to his advantage and only exercise the option if it is beneficial compared to the prevailing market conditions at expiry. In the event of exercise the option seller must fulfil his obligation at loss. To accept this risk he charges a premium payable up-front. Clearly all the buyer can lose is the ...