I have a question about trading options.

[cilbery]

I would like to know how this scenario would play out. Lets say I buy a call. The underlying equity rises in value. I then sell my call for a profit. All well and good right?

...but what I don't get is this. The person who bought the call from me now has the right to buy that equity at the strike price. If the buyer decides to exercise the option, am I the one who has to fulfill the contract, or am I free and clear of the transaction once i sell the call?


Also, is there generally a broker fee associated with exercising an option if i decided to go that route instead of selling the call?

 

[Martinghoul]

Whatever happens after you have sold the option doesn't affect you and should be no concern of yours. So yes, you're free and clear.

As to the fees, you need to check with your broker. There may be some exchange clearing charges that you have to pay when you exercise.

 

[cilbery]

excellent, thanks for the answer.

Just to get a better understanding of the mechanics here, who would be responsible for fulfilling the contract when exercised? The original writer?

 

[Martinghoul]

excellent, thanks for the answer.

Just to get a better understanding of the mechanics here, who would be responsible for fulfilling the contract when exercised? The original writer?

Not necessarily... There's a whole bunch of short positions and there's a whole bunch of long positions. When they expire, the exchange (e.g. OCC) will match the longs with the shorts.

 

[cilbery]

That makes sense. Thanks for the input. Now that I have a better understanding of what's going on under the hood, I think I'm going to start dabbling with options.