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The Intelligent Option Investor: Applying Value Investing to the World of Options by Erik Kobayashi-Solomon

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Chapter 10

ACCEPTING EXPOSURE

Brokerages and exchanges treat the acceptance of exposure by counterparties in a very different way from counterparties who want to gain exposure. There is a good reason for this: although an investor gaining exposure has an option to transact in the future, his or her counterparty—an investor accepting exposure—has a commitment to transact in the future at the sole discretion of the option buyer. If the investor accepting exposure does not have the financial wherewithal to carry out the committed transaction, the broker or exchange is on the hook for the liability.1

For example, an investor selling a put option struck at $50 per share is committing to buy the stock in question for $50 a share at some point in the ...

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